Millions of families with children have probably noticed that their bank accounts looked a little more flush this month because they received an extra injection of cash from the government — up to $300 for each child.
The Biden administration sent out letters to families alerting them about the payments, which are part of an expanded child tax credit that aims to support Americans as they continue to ride out the pandemic. Instead of claiming the benefit during tax season, eligible families are receiving half of the credit in monthly installments that began in July and will run through December.
And while the payments are welcome relief for many households — families including 60 million children received $15 billion in July — there is a fair bit of confusion about what they may mean when it comes time to file tax returns next year.
“Accepting the credit now can be a lifeline for many, but it’s important that taxpayers know how this will affect them during next year’s tax filing season,” said Cari Weston, an accountant and director for tax practice and ethics at the American Institute for Certified Public Accountants, a trade group.
For 2021, the total credit for eligible families is as much as $3,600 for each child under 6 (monthly payments are up to $300) and up to $3,000 for each child 6 to 17 (up to $250 monthly). The credit also became “fully refundable,” which means taxpayers can receive the money even if they owe no federal income tax.
Since the amount families receive in advance is generally based on the prior year’s tax return, households whose financial situations and family status haven’t meaningfully changed are unlikely to encounter problems. Also, with only half of the credit amount being advanced, there is some wiggle room, particularly for families who are receiving the full value of the expanded tax break.
But unlike stimulus payments, if households get more than they are actually eligible for, they will generally have to pay it back — though there are some protections if a family’s income is under certain thresholds.
Here are some of the top reasons taxpayers may want to take a closer look at the potential tax implications or consider opting out of the advance payments. You can stop the installments as soon as next month if you opt out by Aug. 2 through the I.R.S.’s Child Tax Credit Update Portal.
If you are not married
Single, divorced or separated people who share custody of their children should consider opting out if each parent alternates claiming the children on their federal tax return. Whoever claimed the children in 2020 (or 2019, if that’s the most recent return) will automatically receive the monthly payments, which could create complications come tax season if it’s the other parent’s turn.
In such cases, the spouse receiving the credit should opt out through the I.R.S.’s portal, otherwise they may have to repay the money when they file their return. Although the spouse claiming the children will not get the advance payments, they will be able to get the full value of the credit on their 2021 return.
If your income rose or you’re a higher earner
Since the advance payments are based on the income reported on your 2020 tax return (or 2019, if 2020 was unavailable or not yet processed), households with higher earnings in 2021 may be eligible for a smaller portion of the credit, which means they could be receiving too much in advance.
Households that have taken retirement distributions or collected any other type of unearned but taxable income will need to take that into consideration as well, accountants said.
Higher-income taxpayers may also want to consider opting out, tax experts said, because they are entitled to a smaller version of the child tax credit, or the $2,000 per child available under prior law (that translates into payments of $1,000 per child, spread over six months). If taxpayers didn’t factor that into their tax withholdings, they may end up with a lower refund or a higher tax liability come tax season.
You can get the full credit if your modified adjusted gross income (For most people, Line 11 of the 2020 Form 1040) is $75,000 or less for single filers, $150,000 or less for married couples filing a joint tax return and $112,500 or less for “head of household” filers (often unmarried single parents). The credit begins to decline above those thresholds — in two different steps — until it phases out completely.
You can check your eligibility for the credit using the I.R.S.’s Child Tax Credit Eligibility Assistant.
If you’re self-employed
Many freelancers, independent contractors and other self-employed people send the I.R.S. estimated tax payments based on the prior year’s income. But tax experts said that those payments and the money being advanced for the child tax credit could cancel each other out to some degree, which means the taxpayer could end up owing more when they file their return, and potentially could incur interest and penalties.
“The advance of the credit reduces the total amount of taxes paid,” said Rob Seltzer, an accountant in Los Angeles. “So there could be a problem with an estimated tax penalty,” depending on how much the taxpayer earns this year compared with last. It may make sense to run a tax projection with a professional to see if it makes sense to opt out.
If you’ve left the country
You need to live in the United States for more than half of 2021 to be eligible for the advanced payments, but expatriate taxpayers can still claim the expanded credit on their return, according to the I.R.S. (The refundable portion of the credit, however, will be curtailed to the prior $1,400 limit.) Military members stationed abroad are still eligible for the advanced payments.
If you rely on a big refund
Some households are simply accustomed to getting a large refund when they file, using it as a forced savings plan. If you have come to depend on a big refund, you can opt out of all future payments and receive the full value of the credit when you file your return next year.
“Opting out or making changes to the payment comes down to personal preference of when and how you want to receive the money,” said Andy Phillips, the director of the Tax Institute at H&R Block. “If you prefer monthly payments of smaller amounts, no need to make changes.”
If you’re still unsure what to do
Sheila Taylor-Clark, a certified public accountant and secretary of the National Society of Black C.P.A.s, has practical advice for clients who don’t necessarily want to opt out but who may be uncertain on where they stand: “Drop that money into an interest-bearing account, so if you owe money you can just send that back next April,” she said.
How to make changes and opt out
To opt out of receiving the payments, taxpayers should visit the Child Tax Credit Update Portal. If you don’t already have an account, you’ll need to create one. And if you’re married and file a joint return, both spouses will need to create accounts and opt out; spouses who don’t opt out will continue to receive half of the advance monthly payment.
Besides stopping the checks, the portal can be used to check the status of your payments; change the bank account receiving them; or to switch your payments to direct deposit from paper checks.
But you can’t make changes that could result in a larger monthly payment — like adding a child who was born or adopted this year — just yet. The I.R.S. said it has plans to improve the tool later this year and allow taxpayers to add children who are newly eligible (or remove those who do not qualify), as well as report changes in their marital status, income and mailing addresses. But those updates aren’t imminent.
The I.R.S. did say it would automatically make changes for children who were aging out of the credit. For example, the agency said it won’t include a child who turns 18 in 2021 in your payment. Similarly, if a child turns 6 this year, the I.R.S. will adjust the payment to the lower amount for older children.
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