Top Questions About the 2021 Child Tax Credit

The American Rescue Plan Act included changes to the child tax credit that were designed to benefit certain taxpayers; however, some of these changes are now causing confusion and anxiety for many. The American Institute of CPAs (AICPA) recognizes the stress many taxpayers and tax professionals are experiencing and is providing useful information and tips to help ease the burden, reduce the complexity and clarify details.

What Are the Big Changes Taxpayers Need to Be Aware Of?

Among the many changes to the child tax credit, AICPA recommends that taxpayers be aware of the following:

• The age of qualifying children was raised from 16 to 17.
• The tax credit amount has increased for certain taxpayers.
• It is fully refundable (meaning you can receive it even if you don’t owe the IRS).
• Up to half of the credit may be received in monthly payments unless taxpayers opt out.
• The IRS will pay half the credit in the form of advance monthly payments beginning July 15, 2021 as a prepayment of the refund taxpayers would normally receive when they file their 2021 income tax returns. Taxpayers will then claim the other half when they file their 2021 return. 
• How Might the Tax Credit Impact 2021 Tax Returns?

  Taxpayers should also understand that these changes are temporary and only apply to the 2021 tax year, and the decision to have the child tax credit payments received in advance will affect a taxpayer’s refund or amount due when that return is filed.

  This means for those who choose to receive advance monthly payments now, they will either receive a lower refund next year or potentially owe tax (and maybe interest and penalties) that they wouldn’t ordinarily owe. To avoid any surprises, it’s important for taxpayers to contact a CPA to discuss their situation and make any necessary plans.

  Should Taxpayers Opt Out of Receiving the Tax Credit?

  Many taxpayers remain confused about whether they should opt out of receiving advance monthly payments. Here are some of the instances where taxpayers may want to opt out:

  • If a taxpayer expects to owe taxes when they file their return next year, they might not want the advance payments now (as it would add to the amount they owe later).
  • If a taxpayer is paying estimated taxes (e.g., the taxpayer is self-employed), they likely do not want to receive advance child tax credit payments. This is because the estimated tax the taxpayer is paying the IRS and the advance child tax credit payments that the IRS is giving the taxpayer are essentially netting each other out and can result in more tax (and potentially interest and penalties) owed when the taxpayer files their return.
  • If taxpayers are divorced or separated and alternate claiming dependents.
  • If a taxpayer’s income has increased from the prior years.

  “Deciding whether or not to opt out of the child tax credit is a personal and individual decision that each qualifying taxpayer needs to make,” said AICPA Director for Tax Practice & Ethics, Cari Weston, CPA, CGMA. “Accepting the credit now can be a lifeline for many, but it’s important that taxpayers know how this will affect them during next year’s tax filing season as well. The AICPA is providing resources to our members to allow them to help their clients navigate the consequences and challenges they face.”