Tom Talks Taxes - May 29, 2021

How do you advise clients on advance payments of the child tax credit?

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Child Tax Credit Advance Payments

The American Rescue Plan Act of 2021 enhanced the child tax credit for tax year 2021 only in four ways:

  1. Children age 17 or under qualify for the child tax credit,

  2. The credit amount increases to either $3,600 (ages 0 to 5) or $3,000 (ages 6 to 17) if the taxpayer’s modified adjusted gross income is less than $75,000 for single or married filing separately, $112,500 for head of household, or $150,000 for married filing joint,

  3. The credit is fully refundable provided the taxpayer has a principal place of abode in the United States for more than one-half the tax year, and

  4. 50% of the 2021 anticipated credit will be advanced in six payments between July 2021 and December 2021 under new §7527A.

The IRS will create an online portal this summer where taxpayers can either opt-out of the advance payments or report anticipated tax year 2021 changes that will affect their credit amount. Your first inclination may be to simply advise all clients to opt-out; while that advice may make the tax professional’s life easier, it may not be in the best interest of the client.

First, and most important, the advance payments are estimated to reduce child poverty by 50% this year. Advising a general opt-out defeats the key policy objective of the advance payments.

In addition, the advance payments cannot be offset by the IRS toward most debts, while a refund of these credits on the 2021 tax return can be offset. See §7527A(e)(3). Advising a general opt-out will cause these taxpayers to lose these funds to prior debts instead of being available for current expenses.

Two main tax professional concerns include reconciliation of the payments and perceived reductions in refund amounts. Since §7527A(d) requires the IRS to send a document stating the total advance payments by January 31, 2022, the reconciliation should be much easier than that of 2020/2021 economic impact payments and recovery rebate credits.

To the second point, the advance payments will generally not cause significant refund declines since only 50% of the total credit is advanced and the base amounts are higher. Let’s assume a single taxpayer makes less than $75,000 and has two children, who are ages 5 and 8 in tax year 2021:

  • In 2020, that taxpayer received a $4,000 credit on the tax return.

  • In 2021, that taxpayer receives a $3,300 credit on the tax return, and $3,300 in advance payments. The credit claimed on the return is only $700 less than the prior year amount.

An advance payment opt-out may be appropriate for taxpayers who pay in most or all of their federal income tax in estimated tax payments, for example, as the taxpayer can factor the enhanced credits into reduced quarterly payment amounts.

Since a taxpayer may have to repay excess advance child tax credits under §24(j), a taxpayer who anticipates fewer dependents or increased income on the 2021 tax return as compared to the 2020 tax return should use the online portal to provide the IRS updated information. This allows advance payments based on an accurate estimate of the anticipated 2021 child tax credit.

There are still more factors to consider, including 2021 filing status versus 2020 filing status. I hope it is clear that the opt-out decision requires an individual analysis based on the particular taxpayer’s situation. To advise a general opt-out is not in the best interest of many taxpayers.


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