In March 2021, the American Rescue Plan Act expanded the Child Tax Credit (CTC), providing larger payments and a provision for advance payments on the CTC that will start in July. This tax return advance is intended to support families still struggling with financial burdens caused by the COVID-19 pandemic. However, if your family’s income substantially increases in 2021, you might be required to pay the advance back. Read more to discover the specific factors to consider and whether you might want to opt out.

Recent Changes in the Child Tax Credit

The Child Tax Credit has been a provision of tax law for over 20 years, and it is intended to support middle-income earners with young children. When it was first enacted in 1997, the CTC was a $500 nonrefundable credit. Within four years the CTC doubled and became partially refundable. The 2017 Tax Cuts and Jobs Act increased the CTC to $2,000 and expanded the eligible tax bracket up to $400,000 for married couples filing jointly.

The American Rescue Plan Act (ARPA) enacted in March 2021 increased the Child Tax Credit temporarily to $3,000 per child between the ages of 6 and 18 and $3,600 for children under 6 years old. The ARPA also made the CTC fully refundable, meaning if your total estimated taxes equals less than your CTC, the IRS will refund you the balance. The ARPA provides these changes only for the 2021 tax year, although the American Families Plan seeks to expand much of them permanently.  

The biggest change the ARPA made to the Child Tax Credit was to provide for advance payments, which begin in July. With these advanced payments, the government estimates your 2021 CTC and pays up to half of it in a series of monthly installments, the year before you file your taxes.  

Advance CTC Payment Disbursement Dates

Advance payments for child tax credits are slated to begin on July 15, 2021. Qualifying families will receive up to 50% of their estimated CTC for 2021, dispersed in six monthly installments. Taxpayers will claim the other half of their CTC on their 2021 tax return. If you’ve paid taxes or received refunds electronically, the advanced CTC should show up in your bank account as a direct deposit. Qualifying families should receive a letter from the IRS notifying them of upcoming disbursements before July.

Child Tax Credit Eligibility

Families reporting an adjusted gross income of less than $150,000 for married couples filing jointly, $112,500 for head of household filers, or $75,000 for single filers are eligible for the full CTC amounts. The new CTC levels phase out at a rate $50 per $1,000 that the taxpayer’s adjusted gross income exceeds these thresholds. Any qualifying taxpayers who have a primary residence in the United States for more than half of the year will receive advance CTC payments unless they opt out.

Households with incomes that entirely phase out of the ARPA’s increased 2021 CTC can still claim up to $2,000 per child on their 2021 tax returns as long as they are below the 2017 established tax brackets of $400,000 for married filing jointly and $200,000 for single filers. But CTC amounts in these income brackets are only partially refundable, so they will not receive advanced payments.

How the IRS Calculates Advance CTC Payments

Advanced CTC payments are based on your 2020 tax return and the age your children will be at the end of 2021.

Example 1: Jane Jones reported $71,000 as a single mother of two—aged 6 and 8—in 2020. The IRS estimates that her income has not changed, and she will have 2 children between the ages of 6 and 18 in 2021, so she will receive six monthly payments of $500. (Half of $3,000 per child 6-18, dispersed over six months).

Example 2: The Brown household filed a joint, married income of $140,000 on their 2020 tax return and claimed two children, ages 3 and 17. The IRS estimates that their income hasn’t changed, but they have only one under the age of 18 in 2021. They will receive six monthly payments of $300. (Half of $3,600 per child under 6, dispersed over six months.)

Reconciling CTC Advance Payments with Your 2021 Tax Return

Taxpayers whose 2021 income falls within the new CTC’s tax brackets will simply report the second half of their CTC on their 2021 tax return. Reconciling the CTC advanced payments gets slightly more complicated if your household income increased enough to put you over the thresholds, however. First you must calculate your reduced CTC based on the $50 per $1,000 over the threshold, then subtract the advanced payments. Going back to the examples in the previous section:

Example 1: Jane’s income increased to $80,000 in 2021. Her total reduced CTC for 2 children ages 6-18 would be $5,750. ($3,000 per child – ($50 x [($80,000-$75,000)/1000]). Since she received $3,000 in advanced payments,she would report the second half of the CTC as $2,750.

Example 2: John Brown lost his job in early 2020, and he found a new one in early 2021. As a result, the Browns’ income jumped from $140,000 in 2020 to $230,000 in 2021. Based on their 2020 income, they received a total of $1,800 in advance CTC payments. However, their 2021 income completely phases them out of the new CTC brackets. Since the CTC at their income level isn’t refundable, they would need to pay back the $1,800 they received.

If you are divorced and share custody of a child, the Child Tax Credit situation becomes even more complex. Payments will go to the person who claimed the child as a dependent for the 2020 tax year, and that might not be the same parent who claims them for the 2021 tax year.  

How to Opt Out of Advance Child Tax Credit Payments

The IRS plans to launch a web portal on July 1 that allows taxpayers to opt out of advance CTC payments or to modify the income and number of children they are based on.

For families welcoming a new child or who have experienced a loss of income, changing your CTC status makes perfect sense. These are exactly the type of life changes the ARPA was designed to help support.

However, determining if you should opt out of the advance payments all together due to an income increase gets complex (as we illustrate above). If it’s unclear whether or not you will fall within the new CTC income ranges, opting out can save you from having to repay the advanced payments on your 2021 tax return.

Certified Accountants Make CTC Calculations Simple

At Lawhorn CPA, it’s our job to navigate changing tax law—and there have been quite a few changes in the last five years and many unique circumstances in the last two. We make sure to advise our clients about what to expect in tax law changes and how to navigate these changes to avoid unexpected expenses. If you have questions about your advanced CTC payments or CTC status, our offices can help.

At Lawhorn CPA, our team of professional, certified accountants will not only keep you up to date and help you understand all the latest federal tax developments, but we also will provide you with quality tax preparation and bookkeeping services that are specifically tailored to your needs. Because we don’t want to be just your accounting firm, we want you to think of us as your team. If you’re looking for a group of seasoned tax preparers, accountants, or bookkeepers who will help you to plan and execute your own tax strategy, call us at 865-212-4867 or contact us online today.