The first advance payments under the temporarily expanded Child Tax Credit (CTC) will start arriving for nearly 39 million households in mid-July 2021 – unless they opt out. Most eligible families will not have to do anything to receive the payments, but you should understand the implications and why the advance payments might not make sense for your household, even if you are entitled to them.

Understanding the CTC, then and now

The CTC was established in 1997. Unlike a deduction, which reduces taxable income, a credit reduces the amount of tax you owe on a dollar-for-dollar basis. While some credits are limited by the amount of your tax payable, others, like the CTC, are refundable, meaning even taxpayers without federal tax can benefit. Historically, the CTC was only partially reimbursable in the sense that the reimbursable amount was limited to $ 1,400.

The American Rescue Plan Act (ARPA) significantly extends the credit, but only for 2021. Specifically, the ARPA increases the CTC from $ 2,000 to $ 3,000 per child aged six to 17, with credits of 3 $ 600 for each child under six. In addition, the CTC is now fully refundable. It also gives taxpayers the option of taking half the benefit in 2021, rather than waiting for tax time in 2022.

Related Reading: The American Rescue Plan Act Is Past: What’s In It For You?

Note, however, that there are limits to eligibility. The $ 2,000 credit is phased out when the adjusted gross income exceeds $ 400,000 for joint filers and $ 200,000 for other filers, and this continues under ARPA – for the first $ 2,000 . A separate phase-out applies to the increased amount: $ 75,000 for single filers, $ 112,500 for heads of household and $ 150,000 for joint filers.

Receive deposits

ARPA ordered the US Treasury Department to begin making monthly payments of half the credit in July 2021, with the remaining half to be claimed in 2022 on 2021 tax returns. For example, a household eligible for a CCT of $ 3,600 will receive $ 1,800 ($ 300 in six monthly installments) in 2021 and claim the balance of $ 1,800 on the 2021 return. Payments will be made on the 15th^e of each month until December 2021, except in August, when they will be paid on August 13.

To be eligible for advance payments, you (and your spouse, if you are filing jointly) must have:

• Filed a 2019 or 2020 tax return requesting the CLC orprovided the IRS with information in 2020 to claim a stimulus payment;
• A principal residence in the United States for more than half of the year or filing a joint return with a spouse who has a residence in the United States for more than half of the year;
• An eligible child who is under 18 at the end of 2021 and has a valid social security number; and
• Earned less than the applicable income limit.

If the IRS has your banking information, you will receive the payments in the form of direct deposits.

Since the IRS will base the payments on your 2020 tax return (or, if it is not yet available, your 2019 return), you may receive payments in excess of the amount you are actually entitled to. in 2021. In this case, unlike the excess stimulus payments – you will have to repay the excess. The IRS will deduct the amount from your 2021 refund or add it to the amount you owe.

Related Reading: American Rescue Plan Act Provides Drastic Relief For Eligible Individuals and Families

Withdraw

The IRS will automatically register taxpayers for advance payments, but it also provides an online portal to irs.gov where taxpayers can opt out. You might consider opting out if, for example, you were close to income limits in 2019 or 2020, expect to earn more in 2021, and want to avoid overpayments. Be aware that couples who file jointly must both opt out, otherwise the spouse who does not will receive half of the joint payment.

It is not just a change in expected income that could lead to overpayments; it is also a change in the number of dependents. For example, divorced couples who share joint custody may alternate the years in which they declare their children to be dependent for CTC purposes. If 2021 is the year of your ex-spouse, consider retiring (your ex-spouse will not receive the advance payments based on their 2020 tax return but, if they are eligible, they may claim the credit. on the 2021 declaration). Parents of children who turn 18 in 2021 should also consider opting out.

The deadline to unsubscribe from the first payment was June 28, 2021, but you can still unsubscribe for future payments.

Related reading: Biden administration proposes sweeping tax overhaul

Estimate – and reduce – 2021 revenues

If you feel that your income will be approaching the eligibility threshold and you want to take advantage of the credit, you can take steps to reduce your income before the end of the year. You could, for example, increase your contributions to the 401 (k) plan (the contribution limit for 2021 is $ 19,500). Taxpayers with deductible health plans and health savings accounts (HSAs) can also reduce their income with contributions. The HSA contribution limits for 2021 are $ 3,600 for individual health plans and $ 7,200 for family health plans.

Beyond 2021

The expanded CTC is only available for 2021 from now. President Biden has indicated he would like to extend it until at least 2025, and some Democratic lawmakers are hoping to make it permanent. But it will be difficult to pass a bill to implement either of these proposals. We will keep you informed of any development that may affect your tax planning.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.