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Did you receive a letter from the IRS regarding Child Tax Credit payments? Nearly 36 million families received the exact same letter, letting them know they may qualify for the advanced payments of the child tax credit.

What Do You Need to Do?

The question remains, are any action items needed right now?  The answer: it depends. 

Do nothing.  If you qualify for the child tax credit, you will receive the advanced child tax credit payment automatically. Please note, these payments are an advance of the credit.  If, upon filing your 2021 return it is determined the advance credit payments were too high, you would likely have to repay in 2022 with the filing of your 2021 return. 

Opt-out. The IRS is allowing taxpayers to opt-out of the advanced payments via a link on the official IRS website. Please click here to access the opt-out option.

Still not sure which option best suits your situation? Please continue to read on for additional information.

What is the Child Tax Credit and Who Qualifies?

So, what exactly is the Child Tax Credit, and more specifically, who qualifies for the additional expanded credit? The original Child Tax Credit (pre-2021) offered a credit up to $2,000 per qualifying child under the age of 17 and would phase out once modified gross income exceeded $200,000 for single and head of household taxpayers, and $400,000 for married couples filing jointly. 

For 2021, this credit has been expanded to $3,000 per child and if the child is under the age of 6, they will receive an additional $600. As an added bonus, those dependents under the age of 18 now qualify.   There is, of course, a slight catch. The income limits for the additional $1,000/child credit ($1,600 for those under age 6) has a much lower ceiling. The credit begins to phase out when modified gross income reaches the following levels: Single $75,000, Head of Household $112,500 and Married Filing Joint $150,000. The credit is reduced by $50 for every $1,000 over the aforementioned totals. If your income is too high for the additional credit, the pre-2020 rules still apply for regular $2,000 per child tax credit.

For more information on the Child Tax Credit, visit The White House page here.

When Does the Child Tax Credit Begin?

Beginning in July and continuing through December 31, 2021, the IRS will start making advanced payments on the Child Tax Credit, even for those that have phased out of the additional credit. The IRS will use your most recently filed return (either 2019 or 2020) to determine whether or not you meet the criteria to receive Child Tax Credit payments. The advanced payments will be half of the estimated credit, and the remaining half will be claimed on your 2021 return. For those that qualify for the full $3,000/child, this would amount to an additional $250 a month deposit from July through December. The remaining $1,500 will be shown as a credit on your 2021 tax filing. 

Reminder: These Child Tax Credit Payments are an advance, and if your situation changes, so could your credit.

As previously mentioned, these payments are an advance of the credit. If the IRS determines you were given too much in advanced payments then a repayment may be necessary in the form of either a reduced credit on your 2021 return or in some extreme cases, writing a check back to the IRS. There are also situations in which you may prefer to have the full credit on your 2021 return versus half now and the remaining half on the filing of the return. Each tax situation is different and what may work for one family may not work for the other. The IRS is allowing taxpayers to make that decision. If you’d prefer to receive the advanced payments, you don’t need to do anything. If, however, it is preferred to wait until the filing of the 2021 income tax return to receive the credits, you will need to opt-out of the advanced payments. 

In the meantime, we also suggest keeping an eye out on the IRS FAQ page linked here.  Not only does it include the link and instructions on how to opt-out of advanced payments, but it also offers many topics and scenarios that may apply to your specific tax scenario. 

DHJJ Advisory Services

DHJJ offers advisory services to clients for all aspects of taxation, including answering questions on the child care tax credit.

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