Perhaps you have seen stories in the news recently about yet another round of checks coming from the IRS and are wondering if you will be one of the recipients… Well, if you have dependent children no older than 17, read on to see if you qualify and why you may want to opt out even if you do!
Not Stimulus Payments
The American Rescue Plan Act of 2021 (ARPA), signed into law back in March, modified a number of tax provisions and included a third round of direct stimulus payments but most of those have already been mailed earlier this year and are not related to the monthly payments set to go out from the IRS beginning July 15. Instead these payments represent a partial advance of the 2021 child tax credit and, unlike the previous stimulus payments, may be required to be paid back when you file your 2021 return next April. In some instances, these advance payments might even result in underpayment penalties being assessed to you!
Child Tax Credit Changes for 2021 Only
ARPA included a significant overhaul of the child tax credit, but only for the 2021 tax year. Under previous law, the amount of the child tax credit was equal to $2,000 per child, but only $1,000 of that amount was refundable (meaning that the taxpayer receives the credit even if there is an insufficient amount of taxes to be credited against). The American Rescue Plan increased the amount to $3,000 per child (or $3,600 for a child under the age of six) and makes the credit amount fully refundable. The new law also increased the maximum age of qualifying children by a year to include those who haven’t turned 18 by the end of the year.
The amount of the credit representing the 2021 increase over 2020, ($1,600 age-5 and under, or $1,000) is phased out by $50 for every $1,000 of modified adjusted gross income in excess of the threshold amount ($150,000 for joint filers, $112,500 for head of household filers, and $75,000 for single filers). Once the excess amount is eliminated, the amount of the credit remains at $2,000 until the present law phaseout thresholds are reached ($400,000 for joint filers, $200,000 for all other filers).
Unless an election is made to opt out, the Treasury and IRS will begin issuing equal monthly advance payments of 50% of the credit amount beginning on July 15, 2021. The remaining half of the credit not paid in advance will be received when filing 2021 returns, as the full amount is claimed on the return but reduced by the aggregate amount received in advance. A taxpayer under the income thresholds with a dependent child age 5 will receive monthly payments of $300 ($250 per month for older children under 18) beginning July 15 and the 15th of each month through December 2021 unless they opt out of the advanced payments.
In the case of a taxpayer who receives advance payments in error (for example, where a 2019 or 2020 return indicated a dependent child who is no longer a dependent in 2021), the American Rescue Plan provides a "hold-harmless" provision, protecting taxpayers from having to pay back overpayments of up to $2,000 per child. The full $2,000 amount is ratably reduced for taxpayers with income above a threshold amount ($40,000 for single filers, $50,000 for head of household filers, and $60,000 for joint filers). The $2,000 is completely eliminated for taxpayers with income double the applicable threshold amounts, and the entirety of the overpayment must be paid back.
How and Why You May Want to Opt Out
The IRS has now created a website for taxpayers to opt out of receiving the advance payments, or to provide information on status changes that would impact the amount of the credit. The IRS has also provided an eligibility calculator and answers to many frequently asked questions on the site. The website can be found here.
It is important to understand that the IRS will automatically be issuing these advance credit payments based on the most current information they have on file for you. If you have not filed a 2020 income tax return yet, they will issue the advance credit based on the information they have on file from your 2019 return. It may be that your eligibility for the child tax credit has changed due to circumstances such as the arrival of a new dependent, losing a dependent because of a birthday, or if your expected 2021 income level will be significantly different from that of your previous return. If so, you have an opportunity to update the IRS calculation for these changes or opt out altogether, but time to do so is very short before the first payments are to be issued July 15.
Choosing to opt out of receiving the 2021 advance payments does not reduce the credit amount you are ultimately entitled, but if you expect to owe taxes when you file your 2021 return in April next year, any advance you receive now will increase the amount you pay and could also result in estimated tax underpayment penalties if your withholding is not adjusted.
We are happy to answer any questions you may have on how the child tax credit or other changes under the American Rescue Plan affect you, please call our office at 513-241-2940.
Mellott & Mellott, P.L.L.