Washington, D.C. (July 22, 2021) – The American Rescue Plan Act included changes to the child tax credit that were designed to benefit certain taxpayers; however, some of these changes are now causing confusion and anxiety for many. The American Institute of CPAs (AICPA) recognizes the stress many taxpayers and tax professionals are experiencing and is providing useful information and tips to help ease the burden, reduce the complexity and clarify details.
What Are the Big Changes Taxpayers Need to Be Aware Of?
Among the many changes to the child tax credit, AICPA recommends that taxpayers be aware of the following:
The age of qualifying children was raised from 16 to 17.
The tax credit amount has increased for certain taxpayers.
It is fully refundable (meaning you can receive it even if you don’t owe the IRS).
Up to half of the credit may be received in monthly payments unless taxpayers opt out.
The IRS will pay half the credit in the form of advance monthly payments beginning July 15, 2021 as a prepayment of the refund taxpayers would normally receive when they file their 2021 income tax returns. Taxpayers will then claim the other half when they file their 2021 return.
How Might the Tax Credit Impact 2021 Tax Returns?
Taxpayers should also understand that these changes are temporary and only apply to the 2021 tax year, and the decision to have the child tax credit payments received in advance will affect a taxpayer’s refund or amount due when that return is filed.
This means for those who choose to receive advance monthly payments now, they will either receive a lower refund next year or potentially owe tax (and maybe interest and penalties) that they wouldn’t ordinarily owe. To avoid any surprises, it’s important for taxpayers to contact a CPA to discuss their situation and make any necessary plans.
Should Taxpayers Opt Out of Receiving the Tax Credit?
Many taxpayers remain confused about whether they should opt out of receiving advance monthly payments. Here are some of the instances where taxpayers may want to opt out:
If a taxpayer expects to owe taxes when they file their return next year, they might not want the advance payments now (as it would add to the amount they owe later).
If a taxpayer is paying estimated taxes (e.g., the taxpayer is self-employed), they likely do not want to receive advance child tax credit payments. This is because the estimated tax the taxpayer is paying the IRS and the advance child tax credit payments that the IRS is giving the taxpayer are essentially netting each other out and can result in more tax (and potentially interest and penalties) owed when the taxpayer files their return.
If taxpayers are divorced or separated and alternate claiming dependents.
If a taxpayer’s income has increased from the prior years.
“Deciding whether or not to opt out of the child tax credit is a personal and individual decision that each qualifying taxpayer needs to make,” said AICPA Director for Tax Practice & Ethics, Cari Weston, CPA, CGMA. “Accepting the credit now can be a lifeline for many, but it’s important that taxpayers know how this will affect them during next year’s tax filing season as well. The AICPA is providing resources to our members to allow them to help their clients navigate the consequences and challenges they face.”
What Resources Are Available?
AICPA’s 360 Degrees of Financial Literacy program provides Americans with free resources to help them better understand their finances and make more informed money decisions. The website features articles, videos and financial calculators as well as information about working with a CPA, filing taxes and the importance of year-round financial planning.
Taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children, using the IRS’s child tax credit and update portal. Parents may also use the online portal to elect out of the advance payments or check on the status of payments. Note that certain functions of the IRS online portal are not currently available but are coming soon.
The IRS also has a non-filer portal to use for certain situations. Non-filers are those individuals who do not need to file a tax return but would have received a stimulus payment, such as individuals out of work, receiving Social Security or who are homeless.
The child tax credit and advance payments are based on several factors, including the age of your children and your income.
The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.
To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:
Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool
A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year
A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number
Income less than certain limits
Taxpayers can take full advantage of the credit if income (specifically, modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.
Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.
Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.
Contact: Veronica L. Vera