Some changes were made to the Child Tax Credit for 2021, and many clients have been receiving advance payments of the credit as a result. In general, we recommend that you unenroll from the advance payments of the CTC to avoid getting bad news when the time comes to prepare your 2021 tax returns.
The Child Tax Credit has increased from $2000/child to:
$3000 for each child aged 6-17 at the end of 2021 and
$3600 for each child aged 5 and under at the end of 2021.
For those who qualify for the credit*, the IRS will automatically send advance [monthly] payments starting in July 2021. The accumulated payments will make up half of the amount of credit they expect you to qualify for on your 2021 tax returns. Their estimate of your credit will be based on the information on your 2020 tax return, your 2019 tax return if you haven’t filed 2020 yet, or the information you entered using the Non-Filer tool on the IRS website (for Economic Impact Payments).
Their calculations might be incorrect for any number of reasons, most notably:
Changes to your income since you filed that latest tax return; or
Changes to your claim on a dependent**.
Even if the IRS calculation is correct, it may impact your 2021 tax returns in a way you’d prefer to avoid. When calculating your withholding and/or estimated payments, tax preparers and the IRS include the Child Tax Credit if they expect you to qualify for it. If you take part of it early as advance payments, then you’ll take only the remaining part of the credit on your tax returns. That will result in a smaller refund or a bigger balance due than planned. Most of our clients prefer to avoid that kind of surprise. If you’re one of them, we urge you to do two things as soon as possible:
Unenroll from the advance payments (if you’re married, you’ll each have to set up an account and unenroll separately); and
Keep track of the payments you receive during 2021 so we can report them correctly on your 2021 tax return.
Having said that, if you prefer to receive the advance payments and you’re confident that you’ll qualify for the increased credit next year, you can absolutely take them! Just be prepared for it to impact your taxes next Spring.
*The increased CTC will be phased out according to your Adjusted Gross Income (AGI), which is found on Line 11 of your federal 1040 tax return. The phase out starts at:
$150,000 for married filing jointly or as a qualifying widow/widower;
$112,500 for filing as head of household; and
$75,000 for filing Single.
**If you trade claiming a dependent with the other parent and you claimed the child on your last return, you’re in a special position. You’ll likely receive the advance payments because of the CTC on your latest return, but you won’t qualify for any CTC on your 2021 return. That means you’ll have to pay back whatever you receive as advance payments when you file your taxes. In that case, it’s probably better to unenroll as soon as possible.