Those who don’t qualify and fail to opt out will ultimately have to repay the monthly credit of up to $300 come tax season next year.
The new child tax credit, created as part of the American Rescue Plan, expands on the existing credit of $2,000 to provide families a total of up to $3,000 for each child ages 6 to 17 and to $3,600 for each child under age 6. Instead of receiving the credit upon filing taxes, families will receive half of the credit in the form of advance monthly payments.
The expanded child tax credit is fully refundable and available to nonfiling families. This change will be particularly impactful for the lowest-income families, many of whom Indivar Dutta-Gupta, co-executive director at the Georgetown Center on Poverty and Inequality, says faced intensified racial and economic inequality during the coronavirus pandemic.
“The child tax credit has, until now, provided less help for the families at the lowest incomes who arguably would benefit the most,” Dutta-Gupta, says. “The expansion under the American Rescue plan is extraordinarily well suited to stabilize families who are faring the worst right now, as well as those who were faring the worst before the pandemic and likely will be again without broader structural changes.”
The IRS estimates that 39 million households will receive the payment this month, translating to coverage of nearly 90% of all U.S. children. The amount a family receives is based on income. To qualify for the expanded child care tax payments, families must earn an adjusted gross income that does not exceed $150,000 if married and filing jointly or $75,000 for individuals. Families earning a combined adjusted gross income of more than $400,000 will see their credits incrementally reduced to less than $2,000 per child.
“These income thresholds allow for a broad-based credit,” says Francine J. Lipman, a William S. Boyd professor of law at the University of Nevada—Las Vegas, with payments going to families across the income spectrum. “What arguably is different about the enhancements here is that it will go to the most vulnerable families: those who don’t have earned income, those who don’t have a tax liability. This enhancement really helps those who suffer, who really are poor, and even in extreme poverty.”
Qualification is based on a family’s 2021 taxes, but advance payments are delivered using 2020 or 2019 tax information that may no longer reflect a family’s situation this year. And unlike the recent iterations of stimulus payments with which the public has become familiar, the advance child tax credit payments may have to be repaid.
“The government issued stimulus checks. They weren’t taxable, they weren’t advanced payments of their refund, they were just extra money,” says Cari Weston, director of tax practice and ethics for the American Institute of CPAs. “People who don’t fully understand this new credit will think this is just like that. They may not realize that what they’re getting is a prepayment of what they would get anyway when they file the return.”
To avoid repaying the credit later, some families are opting out of the advance payments. This may be the best choice if a family’s income has changed this year, a child is aging out of eligibility or parents are divorced and claiming children as dependents in alternating years.
To opt out, individuals must make this request through the IRS Child Tax Credit Update Portal. Weston says everyone should log on and review the existing information on the portal, which can also be used to check if you’re enrolled to receive advance payments and provide updated bank information for future payments.
“In general, I don’t so much encourage people to opt out as much as be prepared that you’re going to have to pay this money back,” says Adam Markowitz, vice president and enrolled agent at Howard L. Markowitz PA CPA in Florida. “If it was me, who knows how to manage money, sure if the government wants to give me an interest-free loan, I’ll let them give me an interest-free loan. But most people cannot do that, most people do not have that capacity. They have that check and think, ‘It’s mine to spend.'”
As of now, the expanded child tax credit is slated to be a one-year modification for 2021 only, but the Biden Administration has proposed extending the credit into the coming years.
Source: U.S. News & World Report