What is the Advance Child Tax Credit?
Beginning on July 15, 2021, the IRS will provide qualified families advance payments of the estimated 2021 child tax credit.
A child tax credit is an allotted amount per-child tax credit given to taxpaying parents with a dependent child under the age of 17. For the 2021 tax year, the child tax credit is $3,600 for children 5 and under and $3,000 for children 6-17 by the end of 2021.
The advance payments will be half of the total 2021 child tax credit broken down into six monthly payments. The other half can be claimed when families file their 2021 income tax return.
Benefits of Advance Child Tax Credit Payments
As a result of the Covid-19 economic impact, the advance child tax credit is intended to put more money in qualifying family pockets. A qualifying family with three children under the age of 5 will receive an additional $900 per month. At ELP Budgeting Services, we understand a family’s benefit from an extra $900.
Furthermore, if a family does not need the extra money but accepts the advance payments, they can leverage the additional money to invest or cancel debt. For more information, check out our blog post How Your Tax Return is Hindering Your Wealth (And 4 Steps To Prevent It)
Why You Might Want to Opt Out of Receiving Payments
ELP Budgeting Services teaches prior to making a financial decision, it’s essential to gather all the facts. While the extra money could be beneficial, there are important considerations prior to accepting the advance child tax credit payments.
Here’s 3 reasons you might want to opt out:
- Possible overpayment must be paid back
Should a family’s financial situation change in 2021 making them no longer eligible for the amount received, they will have to repay the overpayment when the 2021 tax return is filed. Exceeding the income eligibility can occur as a result of earning more money, selling a large asset, and more.
- You may owe taxes next year
Do you typically owe taxes when filing? Is a large part of your return based on your child tax credit? Receiving half the credit via the advance payments may cause you to owe taxes next year.
- You file separately from the other eligible legal parent
The advance child tax credit is paid to the parent who claimed the child on the latest return, whether 2019 or 2020. Receiving an advance payment when not eligible will require repayment. Parents who alternate tax years in claiming the children will want to communicate this matter.
Here’s how to act
Now that we’ve presented the facts, it’s time for you to act quickly. If you are eligible and would like to receive the monthly advance tax credit payments, you have no action. The payments will be automatically distributed like the stimulus payments.
If you do not want to receive the advance child tax credits, you must opt out here via the IRS portal. This is a time sensitive matter as unenrollment must occur three business days prior to the first Thursday of each month of payments. If you miss the first payment deadline, you can unenroll before the next.
One very important note: If you are married and file jointly, both parents must unenroll. If not, the parent who remains enrolled will receive their half of the advance monthly payment.
Need help deciding what’s best for your budget and financial situation? Contact us!