Explanation of 2021 Child Credit

(cash payments now or tax credit later)

You may have recently received a letter from the IRS regarding a new advance payment Child Tax Credit. This letter is the result of the passage of The American Rescue Plan. This new law allows many families a maximum credit of up to $3,600 for each child younger than age 6, and $3,000 for those between 6 and 17.

Currently, this credit is an advance payment of a 2021 tax credit which will be paid to you beginning July 2021. The monthly maximum payment is $300 (half the allowed credit) for each child. If you elect not to receive the payment then it will be claimed as a tax credit on your 2021 tax return, thus possibly creating a tax refund. If you do not opt out of the program payments may continue into future years as this law does not expire at the end of 2021.

The question is, “Do you receive half of the credit now as a cash payment or wait and use the credit on year-end tax returns?” It’s kind of like an early Christmas present, you can open it now but then there will be less under the tree later. The benefit of receiving the payment now is for cash flow reasons. However, if you normally receive a tax refund as a result of the child tax credit when you file your tax returns, receiving this credit now as a cash payment will make the credit unavailable when you prepare your 2021 tax return. This may cause you to owe money to the IRS.

To obtain the cash payment simply do nothing and the IRS will send you the monthly payments. If you enjoy a full tax credit when you file your returns which may end in a tax refund then you must “OPT OUT” of the program. To opt out go to www.irs.gov/childtaxcredit2021.

Please note, if you do nothing the monthly payments will begin and the full tax credit will not be available when you file your year-end tax returns.

Thanks,

Padden Cooper, CPA’s

Dan Padden | 06/17/2021

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Explanation of 2021 Child Credit