As part of the American Rescue Plan Act passed in March, the child tax credit was expanded to provide families credits of up to $3,600 per child (under age 6) and $3,000 per child (ages 6-17). In addition, families are eligible to receive monthly payments of this credit starting July 15. The payment will be up to $300 per month for each child under age 6 and $250 per month for older children. The tax credit is being structured as advance payments for 2021 only.
Letters to qualifying taxpayers are set to go out soon, explaining the advance payment as well as giving taxpayers the ability to opt-out of receiving the monthly payments. In my opinion, unless you really have a financial need, parents are better off not receiving the advance payment and claiming the entire credit on their 2021 personal income tax return. For example, a divorced mother claimed her child on her 2020 tax return, but the child’s father will claim the child on his 2021 tax return. If Mom received the advance payments, when it comes time to file her 2021 tax return, she will have to repay those amounts because she is not entitled to the child tax credit for 2021.
In other instances, taxpayers intentionally reduce their tax withholding on income earned throughout the year, counting on the child tax credit to cover any taxes owing. If the taxpayer receives the credit in advance, they will likely need to increase their withholding on their paychecks.
Before making a decision on the advance child tax credit payments, it is best to consult with your tax professional about your particular situation.