Payments for the Advance of the Child Tax Credit are scheduled to be deposited July-December 2021. The IRS will base the amount you receive on your most recently filed tax return (2019 or 2020).
The amount paid will be 50% of the credit you would be eligible for based on those returns, see examples below.
The credit amount is $3,600.00 per qualifying child under the age of 6 and $3,000.00 per qualifying child between the ages of 6 and 17.
You are eligible for the total amount of the credit if your income for the year is under:
- $150,000 for married taxpayers filing a joint return and qualifying widows or widowers
- $112,500 for heads of household
- $75,000 for all other taxpayers
If you make over that amount, CONTACT YOUR TAX ACCOUNTANT. Many websites show that the IRS will make monthly payments to those who have children and earn up to $400,000.00 (married filing jointly) or $200,000 (everyone else). That means if you counted on the credit on your return in previous years, you might end up owing more when you file.
YOU WILL AUTOMATICALLY RECEIVE THESE PAYMENTS UNLESS YOU OPT-OUT.
IF YOU WANT TO OPT-OUT OF THE ADVANCE PAYMENTS, the IRS will provide an online portal for those who want to opt-out of receiving the advance. I highly recommend that you review this with your tax accountant before making a decision.
We do not have access to this portal yet, and the IRS has not released a date when it can be expected to open. Since it is already May 20th, that won’t leave much time for you to complete the opt-out process. Keep your eyes on your emails and social media, so you know when the portal is open.
Example 1: Kaylee and her husband have three dependents aged 4, 10 & 12. They file taxes together as Married – Filing Jointly. Kaylee makes $70,000 from a W2 salary and an additional $20,000 from her S-Corp business on her K-1. Her husband is a disabled veteran and collects a monthly stipend of $3,000 from the Veterans Administration. How much will her payments be?
The husband’s income is excluded because VA disability benefits are not taxable. That means for a family of 5; their estimated income is $90,000 for the year. That puts them well under the married income limit so they can expect the total amount of the credit.
1 child age 6 or under = $3,600.00
2 children aged 7-17 = 2 x $3,000.00 = $6,000.00
Total Credit Expected: $9,600.00
50% to be sent via advance payments = $9,600.00/2 = $4,800.00
Monthly payment amount = $4,800.00/6 = $800.00
Last year, Kaylee’s total child tax credit was only 3 x $2,000 = $6,000.00. She included that in her withholding calculations throughout the year and only received a federal refund of $100.00. If she takes the advance deposit of $4,800.00, that will only leave $4,800.00 for her to apply on her tax return against her calculated liability. This would result in a payment due after filing her 2021 taxes.
Kaylee has three choices:
- Opt-out of the advance payment and apply the total amount to her tax return, likely resulting in a refund.
- Receive the advance payment and submit whatever tax is due upon filing her tax return.
- Receive the advance payment and add an additional withholding amount to her paycheck to account for the difference between the credits.
Example 2: Sarah is a single mom of two children aged 5 & 7. She earns $15/hour and works 40 hours a week for an annual income of $31,200.00. Sarah files as Head of Household, does not pay any federal withholding, and takes the standard deduction. She received a refund of $6,000 last year, of which $4,000 came from the Child Tax Credit.
Sarah can expect the full amount of the Child Tax Credit for 2021 as she is well under the income limit. Her total estimated credit for 2021 is:
1 child age 6 or under = $3,600.00
1 children aged 7-17 = $3,000.00
Total Credit Expected: $6,600.00
50% to be sent via advance payments = $6,600.00/2 = $3,300.00
Monthly payment amount = $3,300.00/6 = $550.00
Sarah’s monthly payment amount will be less than her total refund amount. It would be recommended that she tax the monthly payment amount unless she projects to make significantly more money in 2021.
Example 3: Sam is a divorced dad of 4. He alternates who claims the children on an annual basis with his ex-spouse. Since he claimed the children in 2020, he will be the one to receive the 2020 advance payments, even though his ex-spouse will be claiming them in 2021.
No matter how much Sam makes, it would be recommended that he opts out of receiving the child tax credit to prevent complications with his relationship and tax filings at year-end.
There are so many more examples and calculations. It is important that you realize this is an ADVANCE payment, that means if you do not meet the qualifications for it when you file your 2021 taxes, you will have to pay it back.
If you have any questions on your future tax liability or whether you should opt out of receiving this payment, please contact your tax accountant. If you do not have a tax accountant, you can contact us!
The YBC Accounting Team