There has been no shortage of important tax policy updates during the last 16 months. Major areas that have seen shifts include unemployment benefits, retirement rules, filing extensions, and this week we tack on another—the Child Tax Credit.
It’s not breaking news, but at long last, the expanded 2021 Child Tax Credit provision goes into effect. This Thursday, July 15, millions of American households begin receiving monthly payments instead of seeing a large one-time credit put on their tax return.
Another Stimmy?
While the expanded tax credit is temporary for now (stay tuned for updates), it provides yet another financial shot in the arm. It’s been a minute since the latest round of stimulus checks went out (you might recall the most recent payment came in March). That’s also when the nearly $2 trillion COVID-19 relief package was passed which included the Child Tax Credit.
The Details
So here’s the rub: a family receives $3,000 for each child age 6-17 and $3,600 for kids under 6. By default, the family will receive monthly payments based on the number of dependent children. Of course, income limits come into play—if your income is above $75,000 (individual), $112,500 (head of household), or $150,000 (married couples), then you get phased out from full credit eligibility. A married couple would have to make $400,000 or more to be fully phased out. So this impacts a lot of folks—39 million families.
Timing of Payments
Periodic payments (equal to 1/12th the annual credit) begin this week and continue to hit eligible families’ coffers on the 15th of each month for the balance of the year. Do the math, and you’ll see that you are still be owed half the credit when the year ends—that balance will be put on your 2021 tax refund.
Impact On Your Refund & Planning
Here’s where it can get tricky. Many people use their springtime tax refund as a method of saving. If you count on a large refund and you are set to benefit from the expanded policy, then this is a change. You must plan on a potentially lower refund during the 2022 filing season.
Check out the IRS Child Tax Credit Update Portal if you wish to opt-out of monthly payments and would rather take the benefit as a lump sum on your tax return. Changes now would take effect in advance of the August monthly payment.
Crystal Ball
Looking ahead, President Biden wants to extend this provision through 2025 while Democrats want to make it permanent. The mid-term elections are less than 16 months away, so that could have an impact on the expanded credit amounts. We don’t know how it will all play out just yet.
Don’t Count On the IRS For Guidance
Meanwhile, the IRS has been hard at work keeping pace with the huge changes put through by Congress. Believe it or not, millions of taxpayers are still waiting to receive their tax refunds from the last filing season.
And if you have a question for the IRS, don’t expect to be able to get through to a rep. A recent report by the National Taxpayer Advocate says that just 3% of callers to the IRS reached a human.[i] Tack that on to the list of backlogs and supply shortages in our economy right now.
Our Take
Maybe you are one of the families affected by the new Child Tax Credit. It’s time for some good ole fashioned financial guidance from yours truly.
Consider using the extra money to fund your child’s 529 accounts. You can also contribute to a Roth IRA for your child (if he or she has earned income from perhaps a summer job). Or just be selfish and use the supplemental income to boost your retirement savings. It’ll be our little secret!
The Point
The expanded Child Tax Credit monthly payments begin this week. Have a strategy with the bonus income. You’ll be a step ahead of the Joneses if you use the excess cash to bolster your financial situation. So make it count!
As a reminder, check out our new CFO and tax services for business owners.
We’ll talk soon!
[i] https://www.forbes.com/advisor/personal-finance/irs-customer-service-tips/