The IRS is expected to start sending out advance payments of the enhanced Child Tax Credit to parents in July. But some parents may want to opt out of the monthly installments.
The new, expanded Child Tax Credit is part of the American Rescue Plan President Joe Biden signed into law in March. If you qualify, you could receive up to $3,600 per eligible child, depending on how old your child is and what your adjusted gross income is for 2021.
In an effort to get cash to parents who have struggled with bills and child care throughout the Covid-19 pandemic, the IRS is sending out payments of up to $300 per child per month starting in July. These payments are an advance on the 2021 credit and would amount to half of the credit's full value.
This is cash many families are depending on, says Elaine Maag, a principal research associate at the Urban-Brookings Tax Policy Center. When speaking with eligible taxpayers, she's heard that "receiving [the Child Tax Credit] in advance will provide an important lifeline."
Some families, however, could benefit from opting out of the monthly payments and waiting to redeem the credit in full when they file their 2021 taxes next spring.
Here are three reasons why you might want to wait to claim your Child Tax Credit.
If you receive the monthly installments, you should receive $300 per month from July to December for a total of $1,800. You'll be able to claim the remaining $1,800 credit when you file your taxes in 2022. For instance, if you have one child who will be under the age of 6 by the end of 2021 and you meet the income eligibility requirements, you'll be eligible to receive the maximum $3,600.
If you opt out of the advance payments, though, you could get the full $3,600 credit value when you file next spring.
Many taxpayers prefer to receive a large lump sum. Although workers could adjust their income tax withholdings, for example, lots of them like to get a tax refund every spring instead: It's a kind of forced savings, and what feels like a windfall can be a great way to make progress on big financial goals.
To calculate your advance payments for the Child Tax Credit, the IRS will look at your 2020 income tax returns.
The maximum Child Tax Credit amounts to $3,600 per child under the age of 6, and $3,000 per child ages 6 to 17. You'll qualify for the full credit if you're a single filer with a modified adjusted gross income of less than $75,000, a single parent filing as head of household with a MAGI of less than $112,500, or a married couple filing jointly with less than $150,000 in income. The credit phases out for taxpayers with higher incomes.
Wealthier families who may not qualify for the enhanced credit in 2021 can still claim the previous Child Tax Credit of up to $2,000 per child, which begins to phase out at $200,000 in income for single or head-of-household filers and at $400,000 for married couples filing jointly.
Check out Grow's calculator to determine how much you could be eligible to receive.
One of the reasons you might want to wait to claim your Child Tax Credit until next spring is because your tax situation has changed or could change this year.
If you qualified for the enhanced Child Tax Credit based on your 2020 income but your 2021 income exceeds the eligibility requirements, you'll need to pay back any overpayment of the advanced credit when you file your taxes next spring.
"For anyone, owing the IRS money at tax time can be a frightening prospect," Maag says.
Because the IRS is rushing to pay advanced Child Tax Credits with just four months of preparation, experts caution that there could be some calculation errors leading to you getting a bigger payment than you qualify to receive.
To combat the issue, the tax agency has put into effect a "safe harbor" provision to protect low earners. But the provision is complicated. It "is not well understood, so people may fear they could wind up owing money at tax time," says Maag.
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The provision states that up to $2,000 per child would be shielded from repayment if the error is due to net changes in the number of qualifying children, according to the Congressional Research Service. For example, say the system didn't catch that the 5-year-old you included on your 2020 tax return is now 6 and would qualify to receive a maximum of $3,000 rather than $3,600. If you qualify for the full safe harbor provision, you would not have to repay the $600 difference.
You'll be shielded by the safe harbor provision for the full $2,000 if you're a single filer with less than $40,000 in income. If you file as a head of household or as a married couple filing jointly, you'll qualify if your income is less than $50,000 and $60,000, respectively.
The protected amount gradually phases out as your income rises. Single filers with more than $80,000 of income (or, $100,000 for heads of household and $120,000 for joint filers) wouldn't be shielded from any overpayment.
Any credit received in excess of the protected amount would have to be repaid.
If you'd rather receive a large lump sum of up to $3,600 per child when you file your 2021 tax return, you'll be able to opt out of monthly payments using a portal the IRS plans to make available by July 1. The IRS will also make paper forms available for those who don't have internet access, IRS Commissioner Charles Rettig said on April 13 in testimony at a Senate committee hearing.
According to the law, the portal must allow taxpayers to notify the IRS if they've had a change in the number of qualifying children, marital status, significant change in income, and other potential factors the Treasury deems appropriate.
Advance payments won't start until taxpayers have been given opportunity to update information and opt out, Rettig said.
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