Child Tax Credit: Is it right for me?

In case you’re unfamiliar with the Child Tax Credit, it was initially structured in the Taxpayer Relief Act of 1997 as a $500 per child nonrefundable credit designed to provide relief to middle- and upper-middle-income families.  Various laws since that time have modified the credit to expand its availability and benefit to more low-income families and to increase its value.  

Most recently, the credit was expanded and made advanceable thru the American Rescue Plan Act.  For the year 2021, the credit was expanded to $3,600 per child under age 6 and $3,000 per child ages 6 to 17.  The IRS will calculate the payment based on the family’s 2019 or 2020 tax return, whichever is the latest filed.  Starting July 15th, the IRS will be sending out monthly payments called Advance Child Tax Credit Payments of $250 to $300 per child.  On Tuesday, June 22nd, the IRS launched two tools to help families determine their eligibility for the tax credit.  You can find information and links to the tools at IRS.gov.  The first tool will help to determine eligibility and the second gives taxpayers the opportunity to Opt-out of the Advance Payments.  If you aren’t required to file a tax return, you can also submit your information so that you don’t miss out on these payments.

Should I opt out?

I’m glad you asked.  There are various reasons why you might want to opt out of these payments.  I’ll list three:

You prefer a larger tax refund – While the IRS prefers that taxpayers break even each year, the fact remains the many households rely on that annual influx of cash to finance vacations or to clear credit debt.  If this is your preference, the advance payments could potentially reduce the end-of-year credit reflected in your refund.

You experience changes in your household dependents – Since the IRS is using 2019 or 2020 return data to match a household’s eligibility, they are not taking into consideration changes that might occur in a household dynamic.  If you divorced in those years and you and your former spouse have a joint custody agreement, that can affect your eligibility.  If you have a teenager who turned 17 in 2021, that can affect your eligibility.  If either of these scenarios apply to you, you might want to opt out.

You are a small business owner – If you are a small business owner, filing a schedule C you might rely on the Child Tax Credit to help offset your self-employment taxes and to reduce the amount of estimated tax payments filed during the year.  If that is the case, you might consider opting out.

If you decide to opt out, rest assured that does not necessarily disqualify you from eligibility.  The credit, whether paid in advance or not, will be reconciled with your 2021 tax return when you file in 2022.  If you’re unsure what to do, call our office (720-949-7733).  We’re always happy to assist you.