By Jaymon Meikle, Financial Advisor
Here in America, we are made up of remarkably diverse groups of people with differing opinions on nearly every topic. The only thing I know of that’s universally disliked by all Americans is receiving that dreaded letter from the IRS saying you owe money.
But on rare occasions, the IRS will send out letters with good news. And if you’re a parent with kids in your home, you may be getting one of these letters soon.
American Rescue Plan
As part of the American Rescue Plan that President Joe Biden signed in March, the Child Tax Credit was expanded from $2,000 per child under the age of 17 to $3,000 per child under the age of 18 and $3,600 per child under the age of 6.
The expanded credit comes with its own income phaseout levels, which are identical to the phaseouts for the Economic Impact Payments sent out earlier this year and in 2020.
Those levels are $75,000 for single filers, $112,500 for heads of household and $150,000 for married filing jointly. If your income is above these amounts and you used to get the $2,000 credit, don’t worry – you will most likely still qualify for that credit. As long as your income is below $200,000 for single and $400,000 for married filing jointly, you should still get the original $2,000 credit, but you won’t be eligible for the expanded Child Tax Credit.
So now the real question: Why are you getting a letter from the IRS? As part of the expanded Child Tax Credit, there is a portion available for “advance” payments. Starting July 15, you’ll receive monthly payments of $300 for every child under the age of 6 in the home and $250 for children between the ages of 6 and 18. These payments will eventually amount to half your total credit.
The IRS letter will notify you that payments will start automatically, but you have the option to opt out. The advance payment of the credit and the expanded credit itself were only passed for 2021. The Child Tax Credit will revert back to 2020 levels for 2022, though some politicians would like to make this a permanent change.
Take it Now, or Wait?
If you are eligible for the expanded credit, consider whether it would be best to take the advance payments or to wait until you file your taxes for 2021 to claim your credit. Any advance payments received will reduce the amount you will receive when you file your taxes.
For example, let’s say there’s a family of four (two parents and two children) with a household income of $140,000, which would qualify for the expanded credit. But this family tends to barely get away with not owing at tax season, often using tax credits (including the Child Tax Credit) to pay taxes instead of having more money withheld from their paychecks. If this family were to take the advance payments, it could result in them owing on their tax return.
What Works for You?
So, what’s the best option for you? That depends on your specific situation. The answers in finance, as in many parts of life, are never one-size-fits-all.
I suggest you call your tax professional and seek their advice on whether you should take the advance payment. If you would like to know how your taxes and credit play into your overall finances, get in touch with us and we’ll help you put the picture together.