With July 15th quickly approaching, many Americans have questions about how the Child Tax Credit payments will operate. First thing to know is that Individuals and couples can decide if they would like to receive these advance payments or receive a lump sum when filing their 2021 Income Tax Return. The default selection is that you will receive the payments. If you would like to opt out you can do so here: Child Tax Credit Update Portal | Internal Revenue Service (irs.gov)
It is our opinion that most high-income earners should OPT OUT of the advance tax credits.
In the ideal scenario, you are on track to get $0 back at tax time. No refund and no money owed. We work with clients frequently to adjust their withholdings to get as close to zero as we can. If you typically get a very small refund or owe money each year, then receiving the advanced tax credits will potentially cause you to owe more taxes when you file.
However, if you tend to get a big refund when you file, then you would be ok to receive the tax credits now. Just know that this will reduce your refund next year.
Additionally, if your income in 2021 has significantly increased from 2020 you may consider opting out of the advanced credits, which will be paid based on your last filed tax return.
Finally, everyone’s tax situation is unique. This should not be considered specific tax advice. Consult your advisor or CPA concerning your specific situation.
More details about how the American Rescue Plan Act affected the Child Tax Credit can be found below.
First, what is a Child Tax Credit
- As stated by the Internal Revenue Service, the Child Tax Credit allows individuals or couples with children to reduce their federal income tax burden.
How much is the current Child Tax Credit?
- The Child Tax Credit amount has increased to $3,000 per child aged 6 and older (from $2,000) and $3,600 per child under the age of 6 (from $2,000).
- The increase has a different qualifying income threshold than the $2,000 credit (see below).
- The Child Tax Credit now includes children who turn 17 in 2021.
What are advance payments?
- The IRS will pay out half of the total credit in 2021 through monthly payments.
- Monthly payments begin July 15th, 2021, and will continue through December 15th, 2021.
- The monthly payments will consist of:
- $250 per month for each qualifying child ages 6 to 17 at the end of 2021.
- $300 per month for each qualifying child under age 6 at the end of 2021.
- Individuals and families will automatically receive these monthly payments unless they choose to opt out.
- To opt out, individuals must unenroll at least 3 days before the first Thursday of the payment month by visiting here.
- If you opt out of monthly payments, then you will receive the total amount of the child tax credit when filing your 2021 Income Tax Return.
Who is eligible to receive the Child Tax Credit?
- May receive full amount of Child Tax Credit if earning $75,000 or less per year.
- May receive partial amount if earning less than $95,000 per year.
- May not receive any additional Child Tax Credit amount but can still be eligible for the regular $2,000 Child Tax Credit if earning less than $200,000 per year.
- If earning over $200,000 per year, individuals are not eligible for the regular Child Tax Credit or the enhanced Child Tax Credit.
- May receive full amount of Child Tax Credit if earning $150,000 or less per year.
- May receive partial amount if earning less than $175,000 per year.
- May not receive any additional Child Tax Credit amount but can still be eligible for the regular $2,000 Child Tax Credit if earning less than $400,000 per year.
- If earning over $400,000 per year, households are not eligible for the regular Child Tax Credit or the enhanced Child Tax Credit.
Tax management is a critical piece of your financial plan. It is important to stay informed on tax information to better understand and prepare your tax strategy. After all, every financial move you make is a part of your overarching financial plan. And having a solid plan is essential to maintaining financial freedom and happiness. As always, if you need help with tax strategy or your financial plan Burkholder Wealth Management is here to help.