What you need to know about the new advance child tax credit.
Many of you have already received the letter from the IRS talking about the new advance on the 2021 child tax credits. We know reading things from them can be clear as mud sometimes, here's the scoop on what it all means:
The federal government wants to get money into the hands of families earlier than filing your taxes in April, 2022. If you have children up to age 17, each year you may receive a credit for each child you have depending on your total household income we call AGI (adjusted gross income). Stay with me here!
These "advance" payments the IRS wants to give you now, are basically fronting the credit you normally get on your tax return. The letter you are receiving is asking if you want to opt out from getting the money now vs on your tax return later.
Sounds great, but there are some things to be aware of if you choose to get the money now.
- Your refund will be reduced come April because you've already received this money.
- The child tax credit reduces your overall tax liability, it's possible you could owe taxes come April because you've already received the money and it's not being applied against your overall tax liability in April.
- If you receive more than you are entitled to come April when your 2021 tax return is filed, you will need to repay the overage back. An overage can happen when less children are claimed on the 2021 filing or an increase in your AGI beyond the phaseout limits. If you are someone that claims a child every other year, you are definitely running a potential repay situation.
Now that we know the risks, let's talk numbers and how this all works
The maximum credit is as follows:
- Each qualifying child you claim as a dependent, age 5 and under - $3,600 total annual credit
- Each qualifying child you claim as a dependent, age 6 through 17 - $3,000 total annual credit
In order to get this maximum credit AGI needs to be:
- $75,000 or less for single taxpayers
- $112,500 or less for head of household
- $150,000 or less for married couples filing jointly and qualified widow(er)s
- the maximum credit phases out for higher income taxpayers
Let's assume you are entitled to the maximum credit, if you opt to receive the advance child tax credit now, you will receive monthly payments from the IRS for the next 6 months starting July 15, 2021 for the following amounts:
- $300/month per child ages 0-5
- $250/month per child ages 6-17
You will receive the monthly payment using the bank account on file for your last refund or a check if you didn't have one. If you want to add or change your bank account, you can do so within the new account you can create discussed next.
Opting Out & Creating your Online IRS Portal
The IRS has created a new online account you can create to opt out of receiving the advance child tax credit anytime over the next 6 months. You can also update your bank account here. We read in the IRS's instructions that BOTH taxpayers when filing jointly must create an account and opt out. Be watchful of any mention of this once inside your account, the safest route is for you both to create an account and opt out. You'll know if it worked if the payments stop coming!
Coming soon to this online account will be features to add or remove dependents aka kids and change your AGI. Be careful with that.. AGI changing, remember paying back is a thing here.
Here's the link to create your account, you will need a picture ID to create your IRS portal account.
Here's a link to FAQ the IRS published for more info
The IRS will be sending a new year-end tax statement by Jan 31, 2022 reporting the exact amount of advanced child tax credit payments you received. Be sure to bring that to us because that's the only way we'll know what to report. Without it, we'll compute wrong and nobody wants that!
Phew, that was a lot of IRS talk for the day! We hope this helps, if you need us, we're always happy to help.