What Is the Advance Child Tax Credit?
The following article does not constitute tax advice, and is for entertainment purposes only. Everyone’s tax situation is different. If you are seeking tax advice, please seek a tax professional.
What Is It?
The American Rescue Plan Act of 2021, implemented by President Joe Biden in March, gained a lot of attention for the deployment of more stimulus checks to Americans to help cope with the financial strain of the COVID-19 pandemic. However, there was another clause in the legislation that is kicking in starting July 15: The Advance Child Tax Credit.
The ACTC is designed to help offset the unique financial challenges faced by parents during the pandemic. Having an extra mouth to feed is expensive, even more so if you have more than one child that still lives with you. In a normal year, having a child means you now have a walking, talking tax deduction. Each child under age 17 that you claim on your taxes in the “dependents” box typically means a tax credit of up to $2,000. For 2021, this credit has been bumped up to $3,000 for children under 18 years of age, or $3,600 for children under 6. Note that this credit is only available to what the federal government considers “low-to-moderate income households,” which means up-to the following income limits receive a full credit:
· $75,000 for individual taxpayers
· $112,500 for heads of household
· $150,000 for married taxpayers filing jointly, as well as widows/widowers
After these income limits, a $50 reduction is enacted for every additional $1,000 of gross income earned, adjusted for category. A complete phase out happens at $95,000 for individuals and $170,000 joint filers.
Assuming you qualify for the full amount, this is a fully refundable credit and can be received as advanced payments. That last part is important, because it’s what is beginning July 15. American parents are not required to opt-in to the refund as they are automatically enrolled. The roll out will occur in the same manner as the stimulus payments earlier this year: those enrolled in direct deposit with the IRS will receive their advances that way, and checks will administer in waves for those not enrolled in direct deposit.
The payments will be issued on the 15th of every month, starting in July, and ending in December. That’s because the rest of the payments issued to parents will be paid out as a lump sum when you file your 2021 tax return. This means that some parents may not see the final lump sum, as it could contribute to offsetting what taxes you owe, whether through withholdings or capital gains.
Is There A Downside?
The answer is: there could be. Again, check with your individual tax consultant/professional on your specific situation. As these credits are truly 2021 tax credits that the parent(s) is receiving in advance, a change in family situation (income raise, child turns 18, child turns 7, etc) could mean that you would owe that money back to the IRS when you file your 2021 taxes.
If you decide to opt-out of these advance payments and would rather take the full lump sum at tax-time next year, you can certainly do that too. Opting-out must take place directly with the IRS via their online portal. Each payment schedule has an individual opt-out date, which is covered in the table below (source: CNBC Make It).
Remember, there’s no shame in taking the money that is yours in the first place. This is a tax credit, not a handout. This money is specifically meant to make life easier in the short-term by potentially lifting you and your family out of a sticky situation. If you need the money, take it! If you don’t, feel free to opt-out and get the lump sum next year. Either way, this program is looking to help families in need, not cause more financial stress.
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