2021 Advanced Child Tax Credit

Parents Claiming Minor Children

If you do not or will not have children under the age of 18 listed on your 2019, 2020, or 2021 tax returns, please ignore this letter.  For parents claiming minor children (children under age 18) this email is VERY IMPORTANT!

The first part of this email lets you know our advice and the second part provides a little more information for those of you interested in the rules; currently the advanced child tax credit payments are only for 2021. 

Our advice to our clients with minor children:

There are some very recent changes to the tax code, with one of the most significant changes being the advance child tax credit.  Families with children under age 18, will receive a monthly “advance” of their child tax credit from July 15th 2021 through December 15th 2021.    

We are worried that many people who typically receive refunds will instead owe money with their 2021 tax returns or they will get smaller refunds than they are used to because they already received the tax credit via the new monthly IRS deposits.  Also, in certain circumstances, you will have to repay the advance payments if you received more than you were entitled to.

It is IMPOSSIBLE to summarize every scenario in laymen’s terms; thus, we strongly advise people to do 1 of 2 things and we really want all of you to choose Option 1:

Option 1 (Most Preferred):  When you get the monthly advance money, SAVE IT until the 2021 tax return is complete.  This way, IF you have to pay it back, you’ll have the funds handy.  If you don’t need to pay it back, no harm, no foul, and you can then use the funds at your leisure.

Option 2:  Opt-out of the advance payments by going to www.irs.gov/childtaxcredit2021.  Realize that in certain circumstances, opting out could cause you to lose money.

Again, it is impossible to lay out every example—Option 1 keeps you safe, and it’s what we most strongly advise.

Remember when we do your 2021 income taxes in 2022, we must know exactly how much you were paid July – December 2021 in advanced child tax credits.  Please keep careful track of these payments. 

A little more about the details relating to the advanced child tax credit payments:

The 2021 child tax credit is for dependent children claimed in 2021 that are under the age of 18 on 12/31/2021.   This is for 2021 only.

As long as you are below the income limits the child tax credit is increased to $3,000 per child, note if the child is under six years old on 12/31/2021 the child tax credit increases to $3,600 per child.  Income limits are based on filing status.  Married filing a joint return gets the full increase of the child tax credit as long as adjusted gross income is less than $150,000 in 2021, note the additional credit phases out from $150,000 to $182,000.  Head of Household phases out from $112,500 to $144,500.  Single phases out from $75,000 – $107,000.

The IRS is required to pay out 1/12 of the child tax credit July through December of 2021 if:

They look at your last filed income tax return and see if you received a child tax credit on that return.  

They will assume that you will get that same amount again and pay 1/12 of this to you each month UNLESS your income is below the previously mentioned thresholds and if your income on the last return is below those thresholds, they will pay you 1/12 of the higher amounts you are due.

They will pay to the parent who claimed them on last filed return.

Remember in all cases we recommend that all of our clients follow option 1 above with no exceptions.  Option 1 protects you in all cases.  Under the current law you cannot lose by following option 1 and a few of you will win by choosing this option.  Option 1 means you do not opt out and you save the money from the advanced child tax credit payments until after we have filed your 2021 taxes in 2022.

By receiving advanced child tax credits most of you will see lower refunds since half of your child tax credits are being paid to you in advance; please expect a lower tax refund if you receive advanced child tax credit payments.

Here is a quick example:

Married couple filed a joint 2020 return in April of 2021 for 2020.  Adjusted Gross income was $200,000 and they have two children they claim each year ages 8 and 10.  They received a child tax credit of $2,000 per child and received a total child tax credit of $4,000.  When they file their 2021 returns, they again made $200,000 of adjusted gross income.  They make too much money to get the increase child tax credit amount for 2021 and instead they will get the same $4,000 child tax credit for 2021.   That being said it will be paid to them as follows:

They will get a payment of $333.33 from the IRS around July 15th, August 15th, September 15th, October 15th, November 15th, and December 15th 2021. 

When we file their 2021 income tax returns, they will only get a child tax credit of $2,000 instead of $4,000 because they already were paid half by the IRS. 

If all else is the same their Federal refund will decrease by $2,000 since they already were paid this money.

This client will have to fill out our planner and tell us exactly how much they were paid for the 3rd Stimulus and also how much each advanced child tax credit was and when they received it.  All of our clients need to keep great records of these payments.

Have a great summer!

Mike Sylvester, CPA, MBA

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