Tax Pros Warn of Risk to Receiving the Child Tax Credit via Advance Payments

June 21, 2021 Updated: June 21, 2021

While the White House is touting the advance payments of the enhanced child tax credit as a way to help families struggling to make ends meet in an economy that has yet to fully recover from the pandemic recession, some tax professionals are urging people to consider opting out and instead choosing to receive a lump sum during next year’s tax season.

White House National Economic Council Director Brian Deese told CNN in an interview on June 21—which the Biden administration has designated as Child Tax Credit Awareness Day—that “it’s a great day because we will be delivering tax relief to millions of American families.”

“We think that American families, particularly middle-class families with kids, really need a little extra boost in their pocket,” Deese added, noting that part of the benefit is being provided in the form of advance monthly payments starting July 15, and another part as a single payment in 2022.

But some tax experts caution that some people may be better off forgoing the advance payments and instead choose a lump sum later. This is because some people’s changing circumstances with jobs and salaries—given the fact that the IRS uses older income to calculate monthly payments—might mean that they can end up owing money to the government next tax season if they received too much in the way of advance payments.

“That’s going to trip people up because they’re expecting, ‘Well, if the government gave it to me, I don’t have to give it back,’” Eric Pierre, a CPA, said in remarks to Accounting Today.

Another tax professional, Phyllis Jo Kubey, an enrolled agent in New York City, told the outlet that she recommends that only clients who are facing financial hardship now and really need the money should obtain the benefit via advance payments.

About 39 million households, covering 88 percent of children in the United States, are slated to begin receiving the monthly payments automatically, the U.S. Treasury said in a statement. Families that don’t have direct deposit will receive the payment either as a paper check or a debit card.

Epoch Times Photo
The U.S. Department of the Treasury is seen in Washington, on Aug. 30, 2020. (Andrew Kelly/Reuters)

The child tax credit, provided for in the American Rescue Plan, offers $3,000 for each child age 6 to 17 and $3,600 per child under 6 to eligible families. The income threshold to receive the full credit is $75,000 for a single filer, $150,000 for joint filers, or $112,500 for a family with a single parent who qualifies as head of household.

The benefit will be paid out in two parts, with the first half disbursed in monthly installments of $250 or $300, depending on the age of the children, starting July 15 and running through December. The other half, $1,500 or $1,800 per child, again depending on age, is to be claimed on next year’s tax return as a lump sum.

The idea behind providing part of the tax credit in advance monthly payments was to provide the benefit sooner to families who currently may be struggling, in a labor market that has been hit hard by the COVID-19 outbreak and has yet to recover to pre-pandemic levels.

Normally, tax relief for the year only comes the following year when you file your taxes, no matter how much you need it now. This year, you’ll start getting the money in July, the White House said in a fact sheet.

People who filed tax returns for 2019 or 2020, or if they signed up to receive a stimulus check from the IRS, will get the tax relief in the form of advance payments starting automatically on July 15. For non-filers, the IRS has launched a special tool that lets eligible recipients apply for the advance payments.

Since the advance payments mean that eligible individuals will see a smaller tax refund when they file next year, the IRS has said that people will have the opportunity to decline to receive them and instead choose to receive a lump sum in 2022. The agency said it would soon publish details about the opt-out, with reports indicating that this will come in the form of an online tool that will be available before July 1.

Patrick Washington of the Morehouse School of Business Administration and Economics told Alive 11 that for people who are struggling, the advance payment format provides welcome, immediate relief.

“Money has value and importance right now,” he said. “We know the overwhelming majority of people need to take that money right now.”

While the expanded child tax credit is only available in 2021, President Joe Biden has called on Congress to make it permanent.

Follow Tom on Twitter: @OZImekTOM