Child Tax Credits Advances and Your 2021 Taxes
The IRS began distributing advances on taxpayers’ Child Tax Credits on July 15, 2021, as part of the American Rescue Plan passed in March. Taxpayers have the option of opting out of the advance payments. If you have not already done so but wish to, you must unenroll 3 days before the first Thursday of the month you wish to stop the advance. Below are the dates to keep in mind if this is something you are considering.
If you did not unenroll, you should have begun receiving payments. If you are receiving the advances, they will equal half of the Child Tax Credit you are eligible for based on your 2020 or 2019 tax return and household size. The other half will be credited to you on your 2021 tax returns after the amount you receive is reconciled with the amount you for which you qualify.
This will lead to either smaller refund at tax time, if you are eligible, or an increase in the amount you owe because the Child Tax Credit is not offsetting your tax liability to the same degree it normally does when you can take off the full credit when filing your yearly taxes. It is important to take this into consideration, so there are no surprises when you file.
What to Do if You Income Increases in 2021
If your income and household size remain the same in 2021 as it was in 2020, the advances you receive should be on par with the credit you are allowed. However, if your income increases or your household size changes during 2021, you may end up in a higher tax bracket with a reduced Child Tax Credit. In this case, you may have been overpaid in the advances and end up having to repay the excess.
If your income or household situation has or will change during 2021, you can go to the IRS Child Tax Update Portal and alert the IRS to the changes. They will adjust your monthly payments accordingly.
What to Do if You Want to Stop Advances
You may decide you would prefer a larger refund or to owe less on your 2021 taxes. In that case, if you have not done so, you should stop the advance payments. In order to do this, you will need to go to the IRS Child Tax Update Portal and request that the advances stop. As stated above, this must be done 3 days before the first Thursday of the month you wish the payments to cease.
If you file a Married Filing Joint tax return, then both you and your spouse must sign up separately in the IRS Child Tax Update Portal to request a stop to the advances.
There are some unique situations where the Child Tax Credit advances can get complicated. For example, if you are divorced and share custody. If you claimed your child or children on your 2020 tax returns and are receiving the advances but your ex-spouse will be claiming them on their 2021 tax returns, to the IRS it will look as if you have received the advances in error and you will owe the amount advanced when you file.
In these unique situations, such as shared custody, may be handled best by opting out of the advances.
If you have questions about Child Tax Credits and your 2021 tax returns, please contact us.