Christmas in July

If you are like one of 35 million other American families, you received some money from the U.S. Treasury in the middle of July. You received this because of the expanded Child Tax Credit that was part of the American Rescue Plan, which was signed into law by Joe Biden in March 2021. I thought I’d talk for a minute about what this might mean for you. 

Background

Many countries around the world provide tax relief to families with children. An estimated 20% of children in America currently live in poverty. The expansion of the Child Tax Credit intends to act as a social safety net for millions of children and to assist parents who struggle to pay for childcare and bills. Politicians wanted broad support for this, so full benefits are designed to be available to “average” families. This expansion is currently only slated for 2021, but politicians are currently fighting to make it permanent.

How Does It Work

In 2021 you may be eligible to receive up to $3,600 per child under 6 years of age or $3,000 for each child age 6 – 17. This is a significant increase from the previous $2,000 per child tax credit. If you are married and filing taxes jointly, you are eligible for the full credit if your income is less than $150,000 a year ($75,000 for Single). The expanded benefit begins to phase out above that threshold. 

What makes this interesting is that half of the benefit is being distributed in advance via monthly payments from July through December 2021. You receive the remainder when you file your 2021 tax return. So for example, if you qualify to receive a $3,000 credit for one child, you could receive 6 monthly installments of $250 followed by a $1,500 credit when you file your 2021 tax return. 

Also, the expanded credit is fully refundable on your tax return. This means it can take your tax bill below $0, and therefore the government will send you a refund check. This differs from the previous $2,000 tax credit which was only partly refundable. 

What Do I Need to Do?

Most families don’t need to do anything. Half of the credit will be provided to you through December via direct deposit if the IRS has your banking information. If the IRS does not have this information, you will receive paper checks. 

However, there are a few situations that may require action:

• IRS Estimate – The credit you are receiving is the government’s best guess of what you are owed based on your previous tax return’s income, filing status, number of children, and ages of your children. If the IRS makes an error or you have big changes in 2021 (income, filing status, etc.), you may be subject to clawback provisions to repay some or all of the credit. If you think this might be the case for you, keep some money available at year end to pay this back on your tax return. 
• Consider Forgoing Monthly Payments – The government gives you the option of forgoing the monthly payments and deferring the remaining credit. You can do this using the IRS Child Tax Credit Update Portal. This will involve creating an account with the IRS and verifying your identity using a government ID. You have the opportunity each month through December to unenroll for remaining monthly deposits before the next payment is received. Some people choose this option because they like a big tax refund at the end of the year. (Though I like to keep my money in my pocket as long as possible!) There are some other, specific instances where forgoing monthly payments might be appropriate. I’m happy to help you decide if this makes sense for your family.

If you’d like more details, this IRS site has a lot more information. 

Reach out to me if there is anything I can do to help you and your family!