If you have made tiny humans, you may have received some extra stimulus money from the government over the last year. (New shoes and haircuts for everybody!) And you may have heard that the American Rescue Plan Act (ARPA) includes even more support for families with children in the form of advance payouts on the 2021 Child Tax Credit (CTC), up to $3,600 per kid! But there’s a big catch—before you book that trip to Disney, it’s up to you to find out how much of that advance payment you really get to keep.
This credit is different from the other stimulus payments, and if you spend it without doing your homework, there’s a chance you might end up owing a lot more on your 2021 taxes.
Here’s a breakdown of what we know right now and what it means for you:
What is the Child Tax Credit?
Until this year, taxpayers with children age 17 and younger have had the option to claim a Child Tax Credit of up to $2,000, depending on several factors: adjusted gross income, family size, etc. If you have claimed this credit in the past, you may have owed a bit less on your tax bill or received a larger refund at tax time. The advance payments starting July 15 are based on this same idea, but you are getting your payout for up to 50% of the total tax credit sooner. The beauty of this tax credit is that it’s fully refundable, which means that you can benefit even if you don’t have earned income or don’t owe any income taxes.
If nothing has changed and you still qualify for this tax credit, enjoy your early refund! (Just remember that you won’t be receiving as much next April.)
The potential issue here is that the IRS is estimating your credit amount based on your 2020 tax return if it has been filed, or your 2019 tax return if not. If anything has changed since the last time you filed taxes that might disqualify you from earning this tax credit, such as a child turning 18, a higher income or changes in child custody, the IRS may automatically send you a payment that you will need to pay back.
Obviously, the opportunity to receive a portion of the credit before tax time is something new. The IRS will begin to distribute deposits and checks July 15th through this December with a goal of supporting qualifying families with a little extra money to spend right away. If all of the information on your last tax filing is current, you may receive up to 50% of your credit now and 50% when you file again in April.
Another big change is an increase in the maximum credit amount from $2,000 to $3,600 per qualifying child under age 6 and $3,000 per qualifying child between the ages of 6 and 17. However, if your income exceeds a certain amount depending on your filing status, you will not be eligible: the limit is $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers.
What does it mean for me?
First of all, if you have not filed your 2020 taxes yet, you need to do that so the IRS will have the most current information. If you filed your taxes and received a refund, depending on the amount, these payments should benefit you because you will basically get a portion of your refund early in monthly increments from July through December.
If you qualified for the credit in 2020 but still owed money and you expect your 2021 income will be about the same, the IRS will likely still send you payments—and you’re probably going to owe a lot more money next spring. If you’re in this boat, I highly recommend opting out of the payments once the IRS portal opens July 1!
If you share custody, make sure your information is up to date on the IRS website. Single parents who received overpayments on stimulus checks for the same child were allowed to keep that money, but this will not happen with the tax credit. Overpayments will need to be paid back.
Did you have a new baby in 2021? Congratulations! You might be eligible for the credit. The IRS will also open a portal for you to claim that baby on July 1.
If you’re still not sure about where you stand, use this calculator to find out. Whether you are expecting an early tax credit or not, providing for your kids takes careful planning. If you need some help figuring out what to do with your tax credit or how to budget and save for all those family-related costs more effectively, let’s get in touch!