Advance Child Tax Credits: Spend it, save it, opt out?

By Arlene K. Mose, CPA/MS Taxation

Maze & Associates Accounting Corporation

The child tax credit is for any individual who claims a child as a dependent on their tax return. It reduces the tax liability by $2,000 and if the credit exceeds the tax owed, the excess is refunded up to $1,400 per qualifying child.

If you don’t have children, you don’t need to read any further. This article doesn’t apply to you. If you do have children, you’ll be glad to know that the Child Tax Credit is bigger and better than ever for 2021.

In an effort to combat the pandemic, the credit was increased and also “advanced”. Extra money is always great, but the question to spend it, save it, or opt out of the payments all together all depends upon whether or not you qualify. Unlike last year’s stimulus funds, if you earn too much, these “advances” will need to be repaid.

The Increase: For children ages 5 and under the credit was increased to $3,600 ($2,000 + increase of $1,600). For children ages 6 through 17, the credit was increased to $3,000 ($2,000 + increase of $1,000). Once your child turns 18, he or she will no longer be eligible for any credit.

The Advance: The credit was also “advanced”. Congress directed the IRS to pay out HALF of the new credit in six monthly payments starting July 15, running through December 2021. These advance payments will be direct deposit, paper check, or debit card. Half of the credit is “advanced”, and the other half will be received upon filing a 2021 tax return, assuming one qualifies.

If you qualify for the new $3,000 child tax credit, you could get six $250 payments between July and December (which is ½ for a total of $1,500) and then claim the remaining $1,500 on your 2021 tax return.

The amounts can add up fast. Three children under age 5 is $3,600 per child x 3 = $10,800. Half of that is $5,400; paid out over 6 months is an extra $900 per month. Who wants to face the possibility of paying that back.

The Qualification: It’s all based on income. Most taxpayers can probably ballpark their 2021 earnings. If your modified “Adjusted Gross Income” is less than $150,000 married filing jointly, $112,500 as head of household, or $75,000 as a single filer, you can probably spend it.

As your income increases, the credit phases out. It could eventually reach zero. Keep in mind that job changes, investment income, stock and business losses will still impact your 2021 income. Flow thru income from Schedule K-1 entities such as S-Corporations and partnership aren’t even reported until after the 2021 year-end. Maybe a flow thru loss will qualify you. Maybe not. If you aren’t sure, you just might want to save it.

The Calculation: Your accountant will need to reconcile what you actually got paid versus what you should have been paid. They will also need to calculate the TWO different phase-out calculations. Both of these will impact upper-income taxpayers.

The 1st phase-out tier reduces just the increase of $1,000 or $1,600 depending upon the age of the child. This credit gets reduced if your modified AGI exceeds $150,000 if married filing jointly, $112,500 if head of household; or $75,000 if you are a single filer or are married and filing a separate return.
The 2nd phase-out tier reduces the original $2,000 Child Tax Credit. When AGI exceeds $400,000 married filing jointly or $200,000 for all others, the $2,000 per-child credit is reduced by $50 for each $1,000 (or fraction thereof) over those thresholds.
For example: A married couple has one child who is seven. The new enhanced credit for a seven-year-old is $3,000 (the old credit of $2,000, plus the $1,000 extra for children 6 through 17). Their modified AGI is $415,000. Because of their high income, they don’t qualify for the extra $1,000 credit. Now we need to deal with the $2,000 credit. Since their AGI is $15,000 over the $400,000 threshold, their credit is reduced again by $750 ($50 for ea.$1,000 x 15). Their final credit will be $2,000 less the $750, for a credit of $1,250.

Shared custody arrangements for children under age 17 make things complicated. The Child Tax Credit always follows the child. Parent #1 claimed their child on their 2020 tax return and received advance payments for the year 2021. However, when the 2021 tax return is filed, Parent #1 will not report a dependent child. Parent #1 will need to pay back the advance payments. Parent #2 will claim the child and be entitled to the full Child Tax Credit for 2021, assuming they qualify.

Opting Out: By now you have probably decided you don’t even want the money. It obviously too late to opt out of the payments already made, but you can log into the IRS portal and unroll for future payments. If you file married jointly, BOTH YOU AND SPOUSE will want to opt out of your payments. If you do not, the spouse who did not unenroll will receive half of the qualified payment. You will need an existing IRS.gov account, or an “ID.me” account (which is the IRS’s new authorization system). Check the IRS website for Child Tax Credit Update Portal.

Keep in mind that the other general rules for child-tax-credit eligibility continue to apply. The child still must be a U.S. citizen, national or resident alien. You must report the child’s name, date of birth and SSN on the return. You also must claim him or her as a dependent on your 2021 tax return, must be related to you and generally live with you for at least six months during the year.

In preparing for next tax season, please make sure to retain the IRS Letter 6419 which will be sent out in January of 2022. This letter will tell you the total amount of the advance Child Tax Credit payments that were disbursed to you during 2021. You will need this to prepare your return.