The American Rescue Plan Act (ARPA) was signed into law earlier this year by the Biden Administration. Included in this bill is the temporary increase of the Child Tax Credit (CTC) for 2021. This credit has been temporarily raised from $2,000 to $3,000-$3,600 per dependent.
Also included in the ARPA is an option to receive 50% of the credit as a monthly advance payment that will begin July 15, 2021. Your eligibility will be determined by your most recently filed tax return from 2019 or 2020. Taxpayers have the option to receive the monthly payments over the next six months or defer the monthly payments so that the full credit can be claimed on the 2021 Individual Tax Return. There are advantages to accepting the monthly payments and deferring the credit to the 2021 Individual 1040 tax filing. It depends on you and your circumstances.
Let’s explore both of these options and see which one might be right for you.
Deferring the Credit
Deferring the credit allows you to avoid any potential issues for phase-out limits. As part of the increased CTC, the taxpayer must stay under income thresholds to qualify for the increased credit. If you exceed those limits, the difference of what you were paid in the monthly payments versus what you should have received in the credit will be owed back (or deducted from your refund) to net out the credit amount to what should have been received.
The advantage of deferring the full credit until the tax return is filed is that you can avoid this issue of reaching those phase-out limit thresholds and potentially paying back that amount as part of the tax return. Another advantage of deferring the credit is to claim the full amount as part of your refund instead of only half. It’s always nice to have a larger refund.
Allowing the monthly payments will infuse extra income into your household for the last part of 2021 for bills, groceries, emergencies, or even holiday shopping. This can be a huge difference for many taxpayers to have this extra income for the next six months instead of deferring the amounts to claim on the 1040 tax return. For example, a monthly payout for a taxpayer with a nine-year-old dependent would be $250 a month for the next six months.
Which is Best?
Either option is allowable and available to taxpayers eligible for the CTC. Your circumstances will determine which option you prefer. You have until June 28, 2021 to opt out of all monthly payments. Moving forward, you will have the option to opt out of the monthly payments as long as you do it three days before the end of each month. This can be done on the updated portal found on the IRS website called the Child Tax Credit Update Portal.
Taxpayers also need to use this portal to update their annual income increase (or decrease) to allow for wage changes. This will increase or decrease your CTC monthly payment to keep those wages updated so the IRS can accurately calculate the credit you are to receive due to phase-out limits.
There are two options a taxpayer can take advantage of when claiming the CTC. The first is to allow the default option of a 50% credit paid out in monthly payments over the next six months (then claim the other 50% as part of the 2021 tax return). Second, defer all credit payments until filing the 2021 tax return and claim the full credit (as eligibility allows) on the return.
Furthermore, if you aren’t eligible for this enhanced Child Tax Credit, the previous $2,000 CTC can still be claimed on the 2021 Individual Tax Return (again according to eligibility requirements for phase-out rules).
If you have further questions about this credit or which option may be best for you, please reach out to our firm to assist you. We would be happy to use our knowledge to help you make the most of your tax return.
Increased 2021 Child Tax Credit Amount:
- Children ages under 6 $3,600 per child ($300 per month per dependent)
- Children ages 17 and under $3,000 per child ($250 per month per dependent)
Income Phase-out Adjusted Gross Income (AGI) for 2021 Advanced CTC:
- Single $75,000 AGI
- HOH $112,500 AGI
- Married $150,000 AGI