Beginning July 15, 2021, the IRS will distribute the 2021 advance Child Tax Credit payments. These advance payments occur as part of the $1.9 trillion American Rescue Plan Act. This act increased the credit from $2,000 per qualifying child to a maximum of $3,600 for children ages 5 and under, and $3,000 for children ages 6 through 17 for tax year 2021.
If your clients have children claimed as dependents, or if your clients’ children have children, they may want to learn more about the 2021 Child Tax Credit (this is a great way to initiate a connection with the next generation of your client’s family).
This article discusses what the 2021 Child Tax Credit is, how much individuals may be eligible to receive, and whether or not it is in your clients’ benefit to receive advance payments.
What are Advance Child Tax Credit Payments?
According to the IRS, advance Child Tax Credit payments are early payments of 50 percent of the estimated amount of the credit that a filer may claim on their 2021 tax return.
The amount of the tax credit is an estimate the IRS makes based on your client’s previously processed 2020 or 2019 tax return. The credit amount is then divided into advanced payments, which pay out monthly, July 15 through the end of the year.
Who is Eligible for the Child Tax Credit?
If your client has a qualifying child, they will be eligible for the Child Tax Credit. It is important to note that the qualifications for a “qualifying child” changed for 2021. The IRS currently defines a qualifying child as an individual who is 17 or under as of January 1, 2022 as well as meets the following conditions:
- The child is the son, daughter, stepchild, foster child, sibling, stepsibling, or half-sibling of the taxpayer, or a descendent of any of them.
- The child does not provide more than one-half of their own support during 2021.
- The child lives with the taxpayer for more than one-half of tax year 2021 (with some exceptions).
- The child is properly claimed as the taxpayer’s dependent.
- The child does not file a joint return with their spouse for the tax year 2021, or files it only to claim a refund.
- The child was a U.S. citizen, U.S. national, or U.S. resident alien.
The tax-paying client must also have filed a 2020 or 2019 tax return, have a main home in the United States for more than half a year; or filed a joint return with a spouse who does, and made less than the income limit.
The maximum payments per child are available to those with an AGI of $75,000 or less for singles, $112,500 or less for heads of households, and $150,000 or less for married couples filing a joint return and qualified widows and widowers.
How Can Your Clients Get the Advance Tax Credit?
If your clients meet the eligibility requirements, they will be automatically enrolled in advance payments, using the estimated payment numbers gathered by the IRS. The IRS has an Advance Child Tax Credit Eligibility Assistant that can be used to verify eligibility. If they have a tax return filed for 2020 or 2019, they should have this on hand while checking their eligibility.
Why Would Your Clients Want to opt Out of the Tax Credit?
The IRS has a Child Tax Credit Update Portal, which clients can use to opt out of the advance child tax credit payments if they so choose. Opting out of the advance monthly payments means the client would receive the amount in full after filing their 2021 tax return. They may want to opt out now if they are not in immediate need of the payments.
Additionally, if your clients are concerned about overpayment based on the IRS estimates for the advance payments, they may want to opt out so they don’t have to pay any money back after filing their 2021 tax return.
The IRS stated that to stop advance payments, the individual must unenroll at least 3 days before the first Thursday of the month. For example, for the payment month of August, the unenrollment deadline is 8/2/21.
Currently, once un-enrolled someone cannot re-enroll in the advance payments. However, this will change starting September 2021. It is also important to note that in the case of married spouses filing jointly, both spouses must unenroll.
Remember, the payments will begin distribution on July 15, so if your clients are relying on the child tax credit, or hoping to opt out of the advance payments, it is best for them to verify their eligibility as soon as possible.
Disclosure: This document is provided for informational purposes only by Dunham & Associates Investment Counsel, Inc. solely in its capacity as a Registered Investment Adviser and should not be construed as legal and/or tax advice. Dunham & Associates Investment Counsel, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.Subscribe to the Dunham Blog