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Pre-payment of the Advanced Child Tax Credit Thumbnail

Pre-payment of the Advanced Child Tax Credit

I’ve gotten questions recently from a few clients about the pre-payment of the child tax credit money that have been hitting bank accounts recently. So, I wanted to provide some information on this in case anyone else has the same questions.

The Advanced Child Tax Credit Payments is the money the IRS is currently depositing into bank accounts. These are pre-payments of a portion of the child tax credit the IRS expects you to be eligible for, for the year of 2021. It comes with significant changes and is currently only applicable to 2021, but there is talk of trying to make this a permanent change.

In 2020 the tax credit was $2,000 per eligible child. Income phaseout limits were $200,000 for single filers and $400,000 for married filers. This year the credit goes up to $3,000 for eligible children between the ages of 6 & 18 as of Dec 31st, 2021 and $3,600 for eligible children under the age of 6 as of Dec 31st, 2021.

These new increased credit amounts ($1,000 & $1,600 depending on child’s age) have different income phaseout limits. You start to get phased out at $75,000 for single filers and $150,000 for married filers. These phaseout limits only apply to the additional credit amounts. The original $2,000 per eligible child credit amount phaseout limits remain at $200,000 & $400,000 for single and married filers.

These new and lower phaseouts are what will present a problem for some people. If you’re 2020 (or 2019 if your 2020 returns are on extension) adjusted gross income amount on your tax return is lower than those threshold limits, you will have been automatically enrolled to receive these increased credit amounts.

If you’ve been auto enrolled, a portion of your expected child tax credit will be pre-paid monthly from July through December of 2021. This happens automatically unless you opt out.  

However, if your 2021 adjusted gross income (line 7 on your 1040 tax return) will increase above these new phaseout limits ($75,000 & $150,000 for single and married filers) you will potentially be receiving more in these new child tax credits than what you’re eligible for. And based on current rules, you will then owe the IRS on any amounts they have sent you that you are not eligible for when tax time rolls around next spring.

So, if you are receiving these pre-payments but you don’t think you will qualify to actually be eligible to keep this money because your 2021 income will be too high, what can you do? You have two options. First, put these payments in a savings account and wait until tax time next year to settle-up with the IRS. The IRS can always change their minds and decide not to make people who are not eligible pay the money back. Second, you can opt out. The opt out process is a pain in the butt to complete, but it is available to you.  

I hope this helps clarify what is going on for those of you who found extra money in your checking account in July!

Derek Delaney is a Minnesota (Minneapolis / Rochester area)  Fee-Only financial advisor serving clients across the country. PharmD Financial Planning provides professionals and families with financial planning and investment management with a focus on tax-efficient retirement planning.

As a fee-only, fiduciary, and independent financial advisor, Derek Delaney is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.

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