In the past week, you may have received a letter in the mail from the IRS indicating that you might be eligible to receive advance payments of the Child Tax Credit (CTC), which they plan to start paying out on July 15th, 2021. While on its face, this sound like a straightforward enough program, upon closer scrutiny, we have found it to be a densely layered, complex initiative with a host of moving parts, each of which have the potential to raise both short- and long-term tax issues for those who stand to benefit from it.
And so, in order to unpack the information we do have, this e-mail is going to be both dense and complex, and chock-full of bolded text. We know that is cause for glazed eyes and frantic mouse-scrolls over the ‘x’ in the corner; if you don’t ordinarily claim the CTC, then you shouldn’t feel obligated to read on. But if you have children under the age of 17, we can promise you that there is a lot of important, time-sensitive tax information contained in here, and that we’ve done our best to highlight it for you.
What is the Advanced Credit Payment Program?
The advanced credit payment program the IRS plans to roll out in a few weeks is a two-pronged COVID-benefits initiative, born out of a legislative directive contained within the American Rescue Plan Act passed earlier this year. The two main thrusts of the plan are:
- The IRS will pay out half of the CTC amount to taxpayers who ordinarily collect it on their return, in the form of six monthly installments (from July to December)
- Simultaneously, the IRS will enhance the maximum possible CTC amount for certain qualifying filers.
Not everyone will qualify for the enhanced credit—there are a host of phase-out thresholds and earning caps based on adjusted gross income (AGI) that have been baked into the usual CTC criteria—but EVERYONE who usually qualifies for the CTC on their tax returns will AUTOMATICALLY be made eligible for the advanced credit payment program.
How Will the Payment Program and Enhanced Credits Work?
Starting on July 15th, the IRS will pay out advances of the credit—both enhanced and ordinary—to all families who are eligible for the program (again, AUTOMATICALLY). The amounts paid out equate to half of the year-end CTC taxpayers are expected to receive on their 2021 tax returns, and will be spread out over the course of six monthly installments—from July until December of 2021—to be paid on a per child basis.
To demonstrate how this would function in practice:
- The maximum annual CTC for one child between the ages of 6 and 17 is $3,000
- Under the advanced payment plan, $1,500 of that total would be paid out over the course of six months
- The remaining $1,500 would be recouped on the 2021 tax return
The maximum annual CTC for a single child under the age of 6 would break out in a similar fashion:
- The maximum annual CTC for one child under the age of 6 would amount to $3,600
- $1,800 of that amount would be paid out over the course of six months
- The remaining $1,800 would be recouped on the 2021 tax return
Broken out by month:
- Taxpayers with one child aged seven would receive $250 each month
- Taxpayers with one child aged five would receive $300 each month
The IRS has stated that they plan to treat the advanced credit payments much in the same vein as the 1st, 2nd, and 3rd stimulus payments—namely as an advance on a credit qualifying taxpayers would normally receive on their 2021 returns. That means, if you receive these payments, you WILL NOT receive the full credit amount on your 2021 return. Instead, you will receive only the other half of your CTC amount, which will be determined by which version of the credit—either enhanced or ordinary—for which you qualify.
The enhanced credit increases the ordinary benefit from a $2,000 credit per qualifying child (any child aged 6-17) to a $3,000 one per qualifying child (and now includes any child who turned 17 in 2021). For children under the age of six, the maximum possible credit amountincreases to $3,600. Eligibility for the enhanced version of the CTC will be determined by the IRS, and they plan to use both the AGI figure from your most recent tax return, and whether you are eligible for the CTC on it, as their main criteria. As with the advanced credit payment, if you meet the criteria for the enhanced CTC, you will AUTOMATICALLY receive it.
Do You Qualify?
First, however, we want to provide a broader numerical explanation of the expanded credit qualifications. As mentioned earlier, the expanded maximum credits ($3,000 per child for children between the ages of 6-17, $3,600 per child for children between the ages of 0-6) won’t be applicable to everyone. The main factors to take into consideration to see if you are eligible is your 2020 AGI and filing status.
The enhanced maximum credit is available to taxpayers with modified AGIs of:
- $75,000 or less for single taxpayers
- $112,500 or less for heads of household
- $150,000 for married couples filing a joint return, and qualifying widows and widowers
AGIs that fall above these thresholds are subject to a phase-out of the expanded credit—beneficiaries will receive $50 less per child per payment for every $1,000 greater than the threshold of their designated filing status, while the effective qualifying AGI caps are:
- $95,000 for single taxpayers
- $132,500 for heads of household
- $170,000 for married couples filing a joint return, and qualifying widows and widowers
AGAIN—incomes that fall above these phase-out caps are still eligible for the ordinary CTC— $2,000 per qualifying child—and cap at their usual AGIs of $200,000 for single filers, and $400,000 for those who file jointly. There is no phase-out threshold for the ordinary CTC.
Do You Want to Receive Advanced Credit Payments?
This is a question each person will ultimately have to answer for themselves, as individual financial situations vary. For some people, the advanced credit payments are an attractive proposition. A beefed-up CTC could go a long way towards covering immediate expenses for qualifying filers who have been severely impacted by COVID-19, be it from intermittent school shutdowns or loss of employment. If you typically receive a refund on your tax return, taking an advance on part of your CTC will most likely not alter the prospectus of your 2021 tax bill. For others, receiving a diminished credit when filing their 2021 tax return might not be quite so appealing a prospect, particularly if you tend to owe at the end of the year.
The key things you’ll want to factor into your considerations are:
- Your 2020 tax return AGI
- Your anticipated 2021 tax return AGI
- Your filing status
- Changes in your family situation (if you’ve had a child recently)
- Whether or not you tend to owe at the end of each tax year
- Whether you’d prefer to have an advance on your credit now and recoup the rest when you file, or if you’d rather receive it all at once upon filing
If you had a child in 2021, you are entitled to collect the advanced credit payments, as well. You’ll have to visit the IRS portal (via a link we will provide below) and update your information in order to qualify yourself, or to increase the number of eligible children you plan to claim.
Now, while this initiative will almost certainly succeed in providing financial relief to families that need it, there will be those who would rather receive the full amount of the credit at the end of the year as a matter of preference. Similarly, there might be filers who usually encounter large tax bills when they file—if this is the case, losing $6K, $4K, or even $2,000 of credit offset from a tax bill could significantly hike your year-end balance. In that case, it might be worthwhile to consider opting out of the program to avoid owing more money at the end of the year.
The other important things to remember about this program:
- Enrollment in the program is automatic
- The IRS has plans to claw back overpaid amounts—via increased bills on 2021 tax returns
- You can opt out of or into the program through the IRS’ portal at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
No doubt you’ve noticed our preoccupation with emphasizing the automated component of this initiative. On its own, it doesn’t present much of an issue—particularly with the launching of the IRS’ opt-out portal. But given that the IRS is automating qualifications based on prior year data, in a time when incomes are rising and falling dramatically, taken in conjunction with the fact that they have professed to retrieve overpaid amounts by any means necessary, we can see the potential tax-storm brewing for the 2021 tax filing season.
State legislatures have argued against the legality of it, but the IRS has insisted they can and will employ private creditors to collect any balances due. Therefore: if your 2020 AGI would qualify you for enhanced advance CTC payments, but your 2021 AGI increased, it is VITAL that you update your information with the IRS to avoid being paid out more than you are qualified to receive.
For divorced filers with dependents, if you and your ex-spouse alternate claiming your child(ren) each year, the person who claims the child(ren) in the tax year of 2021 is the only one eligible for advanced credit payments. Unfortunately, because the qualifying process has been automated, the IRS will assume whichever filer claimed the child(ren) in 2020 is the filer eligible for the advanced payments. In order to avoid running into trouble with the IRS, if you find yourself in this situation, you should:
- Update your information on IRS portal to either claim or renounce eligibility
- Coordinate with your ex-spouse to ensure that they are either claiming or not claiming the advances
Qualifying Yourself Through the IRS Portal
The IRS promised earlier in the month that they would provide a portal on their website through which taxpayers qualifying for the advanced CTC payments could opt out of the program, and previously unqualified taxpayers could update their information to qualify themselves for it. The portal does appear to be up and active on the IRS website, and can be accessed by following this link: https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
Increased Child and Dependent Care Credit
As another financial relief measure in the American Rescue Plan Act, there was an increase to the maximum deductible amounts of child and dependent care expenses for 2021. We’ll be providing a further exploration of this in another newsletter, which we tentatively plan to send out soon.
If you have made it this far, we hope you found this e-mail informative. As with any large-scale government initiative with potential tax complications, there will invariably be clarifications made, and guidance provided in the coming days and weeks. We plan to update you as that information becomes available to us. In the meantime, we will be posting this text to our website, so that you can refer back to this information whenever you need it.
As always, stay safe out there,
The Team at Gonzalez and Associates