Key Takeaway: Plan ahead. No one wants to be surprised that they might have to owe the IRS a lot more than they anticipated when they file their return. Please contact us if you have any questions or scenarios that you would like to run by us. We will be glad to help!
Spend it, keep it, or opt out?
How to plan for the Child Tax Credit
By now, you may have already received your first of six Child Tax Credits either directly in your bank account or via a check in the mail. For each child, parents will receive $300 per month for children ages 5 and under and $250 per month for children between the ages of 6 and 17. This all seems like great news, but is there a catch? Not necessarily a catch, but it’s a good idea to plan ahead of how this credit can impact your 2021 tax return.
option will prevent the IRS from requesting it back in the case that your income is too high. However, if your income allows you to be eligible, you will receive the child tax credit when you file your 2021 return.
What is the Child Tax Credit?
The Child Tax Credit comes out of the American Rescue Plan Act that Congress launched to continue to provide financial assistance to those in need during the Coronavirus pandemic. The amount of the tax credit is $3,600 for children ages 5 and under and $3,000 for children between the ages of 6 and 17.
Under normal circumstances, a tax credit would only be received when you file your tax return. However, this Child Tax Credit has been expanded so that you can receive a portion of the credit in advance this year instead of waiting until when you file your return. The credit will be sent to parents as a monthly payment that will be $300 a month for children 5 and under and $250 a month for children between the ages of 6 through 17.
If your income is above these limits, you will lose $50 for every $1,000 of additional income you make. The cap amount will vary based on your income, number of children, and your filing status.
How to Opt Out:
If you would like to opt out of the monthly credit payments, the IRS has created a portal on their website to do this. Go to irs.gov/credits-deductions/child-tax-credit-update-portal and follow the instructions there. You will need to opt out three days before the first Thursday of the month by 11:59 p.m. Eastern time to avoid the upcoming month’s payment that you would receive in the middle of the month.
So, what will you do? My guess is that most parents will probably not take the third option of opting out of the early tax credits. This choice is fine,
just make sure you are prepared for receiving less (or owing the IRS more) on your tax return when you file for 2021. It is also a good idea to review your annual income from 2020 and 2019 just to make sure that the IRS won’t phase you out.
Depending on your tax situation, you have 3 options to consider:
Keep it, but don’t spend it.
Opt out of the tax credit.
Option 1: Spend it
If you choose to spend the child tax credit, you will either be reducing the amount of your tax refund or increasing the amount you owe to the IRS. However, be careful. If your income is too high, you could be phased out of this credit and you will have to pay this back to the IRS when you file your return.
Key Note: The IRS is looking at your annual income from 2020, or, in some cases, they are using your income from 2019. Take a closer look at your income for these years. If your income has gone up, you could be phased out of the tax credit. SEE PHASEOUT TABLE
Another reason why you might be phased out is if an ex-spouse is planning to claim a child on their 2021 tax return.
Option 2: Keep it, but don’t spend it.
This strategy will provide a safety measure just in case your taxable income is too high, and the IRS phases you out of the tax credit and you have to pay them back.
Option 3: Opt out of the tax credit.
If you are not sure if your income is too high to be eligible for the child tax credit, this
Key Note: Both parents will need to separately opt out. If only one spouse opts out, the child will still continue to receive half of the credit payment that they were getting.
“FAQ: What you need to know about the child tax credit payments starting in July”, by Michelle Singletary, The Washington Post, July 25, 2021.
“Your Child Tax Credit Payment Just Arrived. Are You Sure You Want It?”, by Laura Saunders, The Wall Street Journal, July 15, 2021.
Have questions? Contact your advisor to discuss.