Last week, nearly 35 million eligible families received their first child tax credit payment, with most sent as direct deposits (those expecting paper checks should receive them soon). These payments will continue monthly, through December 2021 – To confirm you are receiving the correct payment amount, based on your income and number of dependents, or to fix any errors that may be holding up your payment, visit the IRS portal.
You can also use this tool to opt out of receiving advanced payments of the child tax credit, should you have concerns about owing money to the IRS next year or if you’d simply prefer to receive the credit as a lump sum when you file your tax return.
Before you spend the credit, be sure you understand your possible tax implications next year. Below are a few frequently asked questions:
How much will my family get?
For every child under the age of 6, families will get up to $3,600 under the expansion, or $300 per month. For every child ages 6-17, the amount is reduced to $3,000, or $250 per month. This is a significant increase from past years when the credit was $2,000 per child, ages 0-16, however, it is important to note that payment amounts are calculated based upon filing status and income threshold. Payment reductions apply to those earning above $150,000 for married couples filing jointly and $112,500 for single parents who file as head of household.
Unlike previous years, the credit is fully refundable for 2021. This means that eligible families will receive the credit, even if they owe no federal income tax or don’t have any earned income.
Why is this money going out now?
The payments going out now are being referred to as advance child tax credit payments. In the past, families eligible for the child tax credit would receive a one-time lump sum when they filed their taxes. Now, those qualifying will receive half of their 2021 child tax credit dollars disbursed over six months, with a payment made on or around the 15th of every month through December 2021. The second half will be disbursed as a lump-sum when filing your 2021 taxes.
How can I tell if a bank deposit is the child tax credit payment?
According to the White House website, transactions will contain the company name "IRS TREAS 310" with a description of "CHILDCTC" and an amount for up to $300 per qualifying child. Don't get this deposit confused with those for stimulus checks, "TAXEIP3,” or your tax refund, "TAX REF." If you are unable to locate the deposit via your financial institution, you can check payment status using the IRS portal.
Can I opt out of the advance payments and just get the whole credit next spring when I file my taxes?
Yes. The IRS has created a website where you can manage your payments. You will be required to setup an account and verify your identity before you can stop the monthly payments.
By opting out, you are not turning down the credit, just delaying when you get it. This may be a good option for people who are accustomed to getting a sizable credit on their tax bill in the spring and count on that to offset taxes due or if you’d simply prefer to receive a larger one-time payment.
What if my child turns 18 in 2021? What if I have a new baby this fall?
The expanded child tax credit covers children from birth to 17. If your child turns 18 in 2021, he or she will no longer be eligible. However, because the advance payments are based on earlier tax filings, you may still receive money for a child who is ineligible. Most people will have to pay that money back. The IRS does have a repayment protection program for lower-income earners.
If you have a baby anytime in 2021, that child is eligible for the credit. The IRS says you will be able to make changes to your dependents, marital status, and income on its website by late summer.
Here is an example of how this tax credit works:
If you made $75,000.00 as a Single filer in 2021 your Federal Tax Liability due in April 2022 would be Approx. $9700.00.
If you had two children your total credit for 2021 would be $6,000.00, which would reduce the liability of $9,700.00 to $3,700.00 (assuming you never received this “benefit”).
In simple terms, what is happening is the IRS is giving you a cash advance on half of the child credit that your situation qualifies for. Not good, not bad.
In this example, from July to the end of the year the individual will receive $500/ Mo. for 6 Months (totaling $3,000.00) reducing the $6,000 credit to a balance of $3000.00 meaning it will more than likely adjust your refund down (if you normally get one) or your tax liability up (if you typically pay the IRS). If you end up owing when taxes are filed, this may be a bigger issue if you do not still have the cash. People who typically use their overpayment/refund as a built-in savings it will more than likely be less, so plan accordingly.
In closing, the confusion and complexities surrounding the tax code makes the income tax filing process, and specifically whether you owe or not, an emotional issue for many, regardless of your socioeconomic status. In our continuous effort to provide our clients with comprehensive information and personalized planning, we are always available to answer any questions you may have.
For more FAQ visit the IRS 2021 Child Tax Credit and Advance Child Tax Credit Payments: Resources and Guidance website.