The American Rescue Plan that President Biden put in place in March 2021 increased the child tax credit, and with tax season upon us, it’s crucial to figure out the details of the bill and how it affects you. Before the bill passed, the credit was $2,000 for every child aged 17 and under. The bill increased the credit for all children: $3,600 for children under six, and $3,000 for children ages six to 17. Unless you opted out, then you’ve probably received payment via direct deposit.
The Tax Credit in Action
The IRS took your most recently filed return and factored in the ages of the dependents you claimed on that return. In July 2021, they began advancing half of total child tax credit and spreading it out through the end of the year, or until December 2021.
If you’re a single taxpayer, it phased out at $75,000. So, if you made more than $75,000 in adjusted gross income, they reduced that enhanced credit.
For married filing jointly tax taxpayers, $150,000 was your adjusted gross income limit. If you made more than that, for every $1,000 of income, they reduced that enhanced credit by $50.
For this credit, you didn’t have to opt in — it was automatic, as designated by the IRS. When tax season rolls around, here’s what that could look like:
Say you have one child, under six, and you got the credit for $3,600, so the IRS advanced you $1,800. On your 2021 return, your refund is going to change a little because you’ve already gotten half of your child tax credit. If you’re not prepared for it, it could cause surprises.
How to Opt Out
You should have received a letter from the IRS with information about the tax credit on it. If you didn’t wish to receive the advanced child tax credit payments, instructions were made available on how to opt out.
The IRS launched a portal that allows you to sign in so you can opt out, but you need to do so before the end-of-month deadline, and there’s a rule that it has to be done three days before the first Thursday of the month. Unenrolling is a one-time process, and once you unenroll, you can’t re-enroll. So if you missed the first month and you still get that payment, you can unenroll for the remaining payments. You just can’t re-enroll.
If you’re married and filing jointly, this is something that both you and your spouse will want to do. If only one of you unenroll, then you’ll still get half of the payment coming to your bank account, so it’s important for both sides of the married, filing joint return to go in individually and unenroll separately from each other. Note that if you do this, there is a lot of ID verification that goes on, so make sure you’ve got stuff handy to verify your identity and maybe even have a picture ready, just in case.
Why Opt Out?
Getting money sooner rather than later sounds good, so why would anyone want to opt out?
For starters, an income change.
If your income from 2020 was within a certain income bracket, but you went above the income threshold in 2021and got the payments anyway, you’re going to have to pay that money back. If you made too much money in 2021, it would make sense to opt out so you don’t have to pay the money back on your 2021 tax return.
Another reason to opt out? If you’re not good with your money. If you got the money in advance and then spent it all, you may be thrown for a loop come tax season, especially if you don’t plan ahead.
Plan Ahead for Tax Season!
This year has been a whirlwind, and we know the tax credit change has been helpful for a lot of families. It’s also a big change and adjustment, so it’s a good idea to gather as much information as you can before tax season arrives so you can plan ahead.
At Duckett Ladd, we know you want to successfully run your practice and achieve your ideal quality of life. Our accounting, tax planning, and business strategy services can help you do it. To find the fastest solution to your business challenges, get in touch with our team today!
Duckett Ladd, LLP does not provide tax, legal, or accounting advice. This content has been prepared for informational purposes only and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Also, tax law is ever-changing and every effort should be made to seek out the most current information. Make sure to check the date of published content to ensure the most current information.