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In the old days, changes to the tax code were slow to come and rolled out with plenty of advanced notice. Financial planners, tax professionals and individual taxpayers had time to sort through the changes, read the fine print and make adjustments as necessary.
These days, change comes quickly and is often retroactive. Keeping up with the latest IRS tax changes in a timely way can be difficult. Misunderstanding the new rules, making a mistake or missing a deadline is easy to do.
Recently, Congress approved changes to the Child Care tax credit that will apply to the current, 2021, tax year with advance payments starting as soon as July 15. The $1.9 trillion American Rescue Plan (March 2021) increased the amount of the tax credit, made it fully refundable, raised the age limit from 16 to 17, and made payments available in the current tax year rather than requiring taxpayers to wait until completing their 2021 tax return. These changes, however, apply only to the 2021 tax year.
Here’s how a tax credit normally works: A tax credit is a dollar-for-dollar reduction of the amount of Federal income tax you would normally owe the IRS. Whereas a tax deduction reduces your taxable income, a tax credit directly reduces the amount of tax you owe. For example, if your tax bill is $10,000 and you qualify for a $2,000 child care tax credit, the amount of tax you actually owe is $8,000.
Ultimately, a tax credit decreases the amount of tax you owe the IRS, and/or increases your refund amount. A refundable tax credit means that your tax refund increases by the credit amount even if you owe $0 tax. For some taxpayers, a refundable tax credit means that you will receive a check from the government, even if you paid $0 Federal income tax.
The “old” Child Tax Credit. In 2020, if you had qualifying children under age 17, and you met certain income limits (capped at a generous $400k of adjusted gross income for married taxpayers who file a joint return - $200K for single filers), you qualified for a $2,000 partially refundable (up to $1,400) tax credit per qualifying child. You can get even more details on this IRS website.
The new Advance Child Tax Credit. For the tax year 2021, the Child Tax Credit has been increased to $3,600 for qualifying children under age 6, and $3,000 for qualifying children who are under age 18 on December 31, 2021.
If you qualify for the child tax credit, you may receive up to half your benefit this year in the form of monthly checks scheduled to begin as soon as July 15; $250 or $300 per month (based on the age of their qualifying child). Any remainder will be accounted for when you do your 2021 tax return.
Eligibility for the 2021 Advance Child Tax Credit is based on your 2020 tax return (2019, if you haven’t filed your 2020 return). Income limits phase out for married taxpayers who file jointly and have adjusted gross incomes that exceed $150,000. Single filers have an income limit of $75,000. If you qualify for the advance child credit, payments will begin automatically.
However, if your 2021 income exceeds the limits for the tax credit or you do not qualify for some other reason, you may have to pay any monies received back to the IRS when you sort out your 2021 taxes.
Taxpayers who are confident that their 2021 income will exceed the income limits may choose to opt-out of the monthly advance payments. The opt-out deadline for July payments has passed. The deadline for opting out for future monthly payments is as follows:
- August 2 for the August 13 payment
- August 30 for the September 15 payment
- October 4 for the October 15 payment
- November 1 for the November 15 payment
- November 29 for the December 15 payment
Parents who believe they will not qualify for the full credit amount may want to wait and claim their credit when they complete their 2021 tax return. Excess payments may have to be returned to the IRS and could increase the amount of money you owe when you file your 2021 taxes.
Opting out of the advance payments does not disqualify you from getting your full tax credit. It just means that you will receive it when you complete your 2021 tax return, rather than receiving part of it now and part later. To opt OUT of your advance monthly payments, use this portal on the IRS website.
More information on the opt-out deadlines and other information regarding the Advance Child Tax Credit can be found by clicking this link.
Additional resources can be found at these websites:
Most taxpayers with dependent children under age 18 will qualify for the 2021 Child Tax Credit and will begin receiving advance payments in July. If you are unsure about your status or the best strategy regarding opting out of the advance payments, consult your financial advisor or tax professional.
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed and the accuracy of the information should be independently verified. This material was created to provide general information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional guidance. Individuals are encouraged to seek advice from their own tax or legal counsel for their individual situation
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.