On July 15, 2021, the IRS started issuing advance child credit payments to select taxpayers. These payments are based on the child credit that taxpayers could be entitled to on their 2021 tax returns.
The 2021 child credit is $3,600 per child (up to age 6) and $3,000 per child (ages 6 to 17). Payments will be issued in monthly installments from July through December 2021. During this period, qualified taxpayers will receive monthly payments of $300 for each child under 6 years of age, and $250 for each child ages 6 through 17. This is based on information from a taxpayer’s 2020 tax return or their 2019 tax return if their 2020 return has not yet been filed.
Potential Problems for Taxpayers
However, while these payments are well-intentioned, they can cause problems for some taxpayers.
Taxpayers who had a balance due when filing their 2019 or 2020 tax returns after accounting for the credit, or whose income will increase in 2021 to the extent that they are no longer eligible for the credit, can be in for an unpleasant surprise when filing their 2021 tax return.
Unlike the stimulus payments that taxpayers received in 2020, a taxpayer must apply the total amount received as advance child credit payments to reduce the credit taken when filing their 2021 tax return, thereby increasing the taxpayer’s balance due (or reducing their refund) for any advanced payments received.
How Can You Manage Tax Liabilities?
There are a few options that can be employed to help manage tax liabilities if receipt of the advance payments will negatively impact a taxpayer’s 2021 income tax return. Here are some options:
1. The IRS allows a taxpayer to opt-out of advance payments. This can be a difficult and time-consuming process however, as there have been instances where a taxpayer has opted out but still received a payment.
2. Another option would be to have the taxpayer’s federal withholding increased to offset the credit payments received. A taxpayer should speak to their payroll department to initiate this option.
3. Finally, the amounts can be repaid through estimated tax payments by remitting the amounts received as estimated tax payments which would be due on or before September 15, 2021, and December 15, 2021.
Receive Top-Quality Tax Services From ECS Financial
If you qualify to receive advance child credit payments from the IRS, we encourage you to review your personal tax situation to determine the best course of action for you. Feel free to contact us at ECS Financial Services if we can be of assistance in evaluating your options.
About the Author - Mark Neeb, Manager, CPA, ECS Financial Services, joined the firm in 2014 and has over 20 years of experience in public accounting. Mr. Neeb's areas of expertise include business and individual income tax, tax planning, real estate accounting, as well as review and compilation engagements, and financial statement preparation. Mr. Neeb is a licensed CPA in the state of Illinois and holds a Master of Science in Taxation degree from DePaul University, and a Bachelor of Business Administration degree from the University of Wisconsin - Eau Claire.