Come July 15, the IRS will start issuing payments to more than 36 million people who are eligible for the expanded child tax credit as part of the $1.9 trillion coronavirus relief plan.
Rather than wait until taxpayers file their 2021 tax returns, the agency will start sending monthly advance payments worth half of the total credit. Payments will come on the 15th of the month for six months. Then taxpayers can take the rest of the credit on their 2021 return.
The Internal Revenue Service is sending letters about the credit to eligible families this week.
In all, the credit could be worth as much as $3,600 per child up to age six, and $3,000 per child ages 6 to 17. Singles with adjusted gross income of up to $75,000 and married couples who file a joint tax return and earn up to $150,000 would get the full amount based on 2019 or 2020 tax returns, or based on information that taxpayers entered last year into the IRS’ Non-Filers tool.
The credit would then phase out, going down by $50 for every additional $1,000 of income.
But there may be good reasons for some taxpayers to refuse to take the monthly advance payments, tax experts said.
If your eligibility changes over the course of the year because you earn more income, you will have to pay back any overpayments when you file your 2021 tax return, said Gail Rosen, a Martinsville-based certified public accountant.
This could hold true for millions of people who were unemployed because of the pandemic, or for people who get new jobs with higher income.
Rosen offered this example:
Let’s say you had two qualifying children under age 6 in 2020. The IRS will use your 2020 return to see how much of the child tax credit you qualify for in 2021. In this case, it’s $7,200, or $3,600 per child.
The IRS will automatically send you an advance child tax credit of $600 per month, Rosen said.
“But let’s assume when you file your 2021 tax return, your adjusted gross income turns out to be higher than 2020 and you’re only eligible for a child tax credit of $1,000,” Rosen said. “Then you would be required to pay back $2,600 with your 2021 tax return — $3,600 received in advance, less the $1,000 child tax credit, which would equal $2,600 due back to the IRS.”
The child tax credit payments are different from the three stimulus payments, where if your income went up in 2020 but the IRS sent you payments based on your 2019 return, you did not have to pay the funds back, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.
You will have to repay it this time.
Becourtney said if you know for certain that your income isn’t substantially changing, there’s no reason to opt out of the monthly advance payments.
But if you know your income will rise substantially in 2021, potentially making you ineligible for the credit, or only eligible for a smaller credit, you may want to opt out of getting the advance payments.
There are other reasons your eligibility could change. For example, your children’s birthdays could put them over the age cut-offs. Or if you’re divorced or unmarried and you take turns claiming the credit with your child’s other parent, you could inadvertently get the credit two years in a row.
To avoid any payment errors, the IRS said it is creating several online tools to help taxpayers update their information with the agency, and it will also give you the opportunity to opt out. We should see that tool sometime before July 1, the IRS said.
Just remember that if you’re not eligible for the new higher credit, you may be eligible to claim $2,000 per child — the previous amount available — as long as adjusted gross income is below $200,000 for singles and $400,000 for those married filing joint returns.
While the child tax credit was only expanded for the 2021 tax year, some lawmakers, including Sen. Corey Booker, want to make it permanent.
But tax experts aren’t convinced that will happen.
“I do not anticipate the expanded 2021 credit being made permanent given the lack of cooperation between the Democrats and the Republicans in Congress on various matters,” Becourtney said. “I view it as a short-term measure to help the lower income and middle class population recover from the financial impacts of the pandemic.”
The IRS is urging those who haven’t yet filed their 2020 or 2019 tax return to do so as soon as possible so they can receive any advance payment they’re due. You can do that using IRS Free File.
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Karin Price Mueller may be reached at KPriceMueller@NJAdvanceMedia.com.
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