Advance Child Tax Credit…Should You Turn It Down?

Hello again everybody, from the University of Illinois Tax School. This is Tom O’Saben, Enrolled Agent, I’m the Assistant Director of Professional Education and Outreach for the Tax School. I’m also a Fall Tax School instructor, an author and reviewer of the University of Illinois Federal Tax Workbook, our webinar series we do throughout the year will feature myself as well. I’ve been doing these weekly blogs for now coming up on my second anniversary and during the tax season we try to put them in a video format so you can listen to them as you’re getting your day started. Another week to go folks. Hang in there, you can do this. I feel your pain because like you, I’m a tax practitioner, I’ve been at this for now 31 years. So let’s see what we’re going to talk about today.

In particular, I want to talk about the 2021 change to the Child Tax Credit under the American Rescue Plan and more specifically, the advance payments that the IRS is going to begin sending out in July. And you might find this crazy for me to say, but I wonder if there’s an argument to turn the payments down. In other words, reject those payments and not take them now. So let’s talk about specifically what I’m referring to, the Child Tax Credit or the change in the Child Tax Credit and the advance of the new Child Tax Credit payments all comes out of the American Rescue Plan, which I show you here as PL 117-2. Particularly the provision I’m referring to is 9611 under the American Rescue Plan which changes the Child Tax Credit in what I feel are some profound ways for just 2021. Now I want to point out to you that that’s as of today, so this blog is going out May 10, 2021. We know that legislation has been changing hot and heavily. But as we have law right now, the changes I’m going to talk about are for 2021 tax returns only, not your 2020 returns that you’re filing in 2021. But 2021 returns that you in fact will be filing in 2022, but we still have to be prepared based on the planning and the topics that I’m going to talk about.

So we talk about the Child Tax Credit being expanded by the American Rescue Plan, what am I referring to? It’s going to increase for many taxpayers and by the way, this information came directly from irs.gov. The credit for qualifying children now is fully refundable. Before 2021, the Child Tax Credit was a non-refundable credit, in other words, there had to be tax to go against the credit, but there could be part of it that was in fact called an additional Child Tax Credit, that was refundable. Now we’re looking at the entire credit falling under the refundable category, which means it’s going to go to taxpayers, regardless of whether or not there’s any tax bottom line before withholding. But we’re going to have to see for those clients to whom it applies. The credit will also include children who turned age 17 during tax year 2021. You might remember from previous law that the rule was that they had to be under age 17 as of the end of the year in order to qualify for the $2,000 Child Tax Credit that’s now going to go through their age 17. And this is the part that that I’m talking about, should we take the money, taxpayers can receive part of their credit early before filing their 2021 return. That’s the thing I’m concerned about.

And the reason I’m concerned is because these increased amounts end up actually being phased-out. And you’re going to recognize these numbers from our stimulus payments and then I want to make sure that I explain this to you because it’s going to be a little bit different. If taxpayers who file jointly have adjusted gross income over $150,000, the increased Child Tax Credit starts to phase-out. That number is $112,500 for head of household and $75,000 for all of the taxpayers. Again, these phase-outs look familiar to you because they were the beginning level of the phase-outs for all the stimulus payments. Remember the $1,200 and the $600 and most recently the $1,400. And so what I’m afraid that our clients are doing is they’ll see these phase-outs and they think, “Well, okay, if I get stimulus payments, and my situation ends up being different, I don’t owe any of this money back.” That’s true with stimulus payments. I’m going to tell you, that’s not true when it comes to these Advance Child Tax Credit payments.

So as I’ve been talking about, families who claim the Child Tax Credit for tax year 2021, it’s been increased to $3,000 versus the previous $2,000 for qualifying children between the ages of 6 and 17 as of the end of 2021. Again, the big difference here, the dollar amounts certainly and also including those children who turned 17 during the year, again, 2021 only. Here’s a kicker, if we have children under the age of 6 by the end of 2021, that credit actually has been bumped up to $3,600. So instead of $3,000, it’s $3,600, so pretty good deal. So what happens here is the American Rescue Plan says that there are to be advance payments of the 2021 Child Tax Credit, paid in July through December to eligible taxpayers who have a home in the United States for more than half the year. What’s the limitation going to be? 50% of the Child Tax Credit that the IRS is going to calculate, based on what? They’re not going to have 2021 information yet. No, they’ll go off the 2020 returns. But if for some reason, the 2020 return is not yet filed, they’ll go off the 2019 return information, you know, assuming that client might be on extension, or just hasn’t gotten around to filing yet. So that’s the data they’re going to use in order to start sending out these payments beginning in July. IRS advice on their website, in fact, is for taxpayers to file sooner than later. I don’t know that I agree with that.

So they say that eligible taxpayers don’t need to do anything now, other than to file their 2020 return if they’ve not done so. Because what’s going to happen is in the American Rescue Plan, it says that the IRS is to establish a portal. And in establishing that portal, it’s going to give taxpayers the opportunity to go to the site. Now, I’m getting mixed information on and I’m also getting a little bit ahead of myself on slide information, but I’ll repeat it. Going to the portal to either opt out of receiving these advanced payments, or to update their information. For example, let’s say that taxpayers had a child in 2021, well that child’s not going to be on a 2020 return and certainly not on a 2019, they could update their information so that they would receive more Advance Child Tax Credit or they could also say they want to opt out. Now, the IRS website says you don’t have to go there to opt, in fact, the IRS website says you have to go there in order to opt in, the law says you have to go to this portal that they’re going to design in order to opt out, we’ll wait and see. So we’re going to be able to decline receiving those advance payments. That’s what I’m talking about with the issue of the portal, again, change the information. And this is the part that will help all of us and maybe give us a little bit less angst as tax professionals, is that again, according to the law and the IRS website, it says the taxpayer should receive information, I don’t know in what format, whether it’s a 1099, or a letter or something that will come on in January, informing taxpayers how much Advance Child Tax Credit they received. I’m relieved to see this provision because I’m sure your experience has been the same as mine going through this 2020 filing season and we ask clients about stimulus and they don’t remember. I’m thinking, you know, in the most recent round, if I had 2 children, and I would have gotten close to $7,000 just recently, I think I’d remember that. So imagine our clients trying to remember $300 per child up to $300 coming early. So I’m really thrilled that they say they’re going to have some kind of way of informing clients in January of 2022, what amount of Advance Child Tax Credit they received, so that we have that information, so we can properly file 2021 returns and that’s where the rub comes in. Again, I mentioned the ability to update or decline participation will be made via an IRS portal, it isn’t yet created. Stay tuned. If you’re not a member of our Facebook group, I certainly would encourage you to do so, it doesn’t cost anything, we’ll give you the link down here in the transcript portion of our video. As soon as we have that information from irs.gov we will post it on our Facebook page. We’ve got more than a couple thousand members now and they’re also very astute and in tune with what’s going on, they’ll probably inform you as well. But as soon as we know that portal is live, we’ll let you know, again probably via a Facebook announcement.

So, what’s wrong with getting some of that money early? I’ve been kind of intimating this in this whole presentation, haven’t I? Here we go. This isn’t free money. Unlike the stimulus payments, which the law states, there could be an adjustment for our clients to get more. But if their income, for example, was higher than what was projected for stimulus, it could not be reduced below zero, so they would not owe any of it back. This is not the case with the Advance Child Tax Credit, it is going to have to be reconciled on the 2021 return and that’s the part that concerns me. Could our clients end up owing some or all of that Advance Child Tax Credit Back? So we have to decide with our clients and you don’t have to go with my opinion. But what’s better? Is it better for our clients to get $300 per child between July and December of this year, or a lump sum when they file their 2021 returns? I’m not trying to look in anyone’s pocketbook, or try to dictate what I think should happen financially, but I think it’s worth a conversation with your clients. Does your client want to possibly owe some money back? Opting out might make sense, but in my opinion, once that portal is established, I think we have to be proactive in order to opt out. At the very least, I think we need to go look at it once it’s up and live.

Because here’s what happens and why I’m concerned about it. There’s actually phase- outs of this Child Tax Credit and I didn’t mention this, but at the beginning I said that the Child Tax Credit in 2021 is refundable. Well, there’s a trade off for that and that’s these phase-outs. Okay, two phase-outs. The first phase-out will eliminate the amount above the old $2,000 one. When do we hit that? Again, this is going to look familiar to you. When single filers hit an adjusted gross income of $75,000, head of households reach $112,500, married filing jointly $150,000. Now the first thing you might be thinking is, “hmm, we could maximize stimulus by doing married filing separately, I wonder if we could do the same thing for the Child Tax Credit?” The answer at this point is I don’t know. So I’m not going to go out on a limb, I’m going to say that $75,000 probably also applies to married filing separately. But let’s wait and see. So we have a phase-out of that additional amount when taxpayers get above the limits, I just pointed out to you, so they can lose that additional amount because their income in 2021 is higher than it was in 2020.

Well, there’s a second level of phase-out for our higher income taxpayers. The $2,000 credit could in fact go away, be reduced down to zero, when AGI reaches for married filing jointly as I have it here on the screen for you, $400,000 for all other filing statuses, $200,000. So we don’t know at this point whether a client might be contemplating the sale of land, or the sale of their business, or a large capital gain through the sale of investments they might have, where their income could be substantially higher in 2021, they could end up owing back all of the Advance Child Tax Credit. Now, if they didn’t get the Advance Child Tax Credit, then we have a circumstance where when we get into these income strata levels that I’m describing, no Child Tax Credit would apply. That’s really not anything new, but at least they wouldn’t owe more back because they got an advance based on the portal that’s being set up, or the dictate of the American Rescue Plan.

I’ve given you some information to have here. If you want to go look at this more in chapter and verse on the American Rescue Plan I’m giving you a link to go to and we’ll also have it in the transcript portion of the video blog below. If you want to go ahead and look at the American Rescue Plan, get the chapter verse for yourself, and also where I’m getting the IRS guidance, which the website again is also shown to you and we’ve got it for you in the transcript below. So again, lots to think about, I’m not trying to tell you to tell your clients that getting the advance is a bad idea, I just want our taxpayers to be informed. So you’re informed, you’re in a better position to share with your clients the information which says yes, if you don’t do anything, and you’ve got children 17 or under on that 2020 return, guess what? There’s going to be Advance Child Tax Credit payments sent out based on your 2020 information. Lots of clients love to do nothing. So that being said, Is that the best answer? And I think it would be important to somehow correspond with your clients to have that discussion. Yes, we know we’re still just in the emergence from the pandemic situation and clients are still in a lot of cases in financial distress. And having that extra $300 a month would be nice, but what’s going to happen if they owe it back next year? This is not like the stimulus payments, they could in fact, owe some or all of that advance back. That’s my concern.

Well, we got a week left, folks. Hang in there. Next Monday I’ll be reminding you that if those clients don’t have the returns filed to go ahead and get those extensions filed on Monday, May 17. We got one week, hang in there. We’ll be here with you. Remember that I call us the “I” in your team. So for all of us at your team at the University of Illinois Tax School, this is Thomas O’Saben saying we’ll say goodbye, for just a while.
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