Thought to post about this year’s $3,000 child tax credit.
The $1.9 trillion aid package that the President signed into law in March temporarily expands the child tax credit. For the 2021 tax year, the credit is upped to $3,000 per child age 17 or younger and $3,600 for children under the age of six. That’s up from the original $2,000 child tax credit which was only sent for children age 16 or younger.
Elaine Maag, principal research associate in the Urban-Brookings Tax Policy Center at the Urban Institute said that the expansion of the credit will dramatically reduce poverty for families with children. But will it really?
It’s been proven time and again that the government throwing money at a problem never really ever solves the problem. Many times it just makes the problem worse. I’ll cite LBJ’s great society as an example.
But I digress.
Up to half of the 2021 child tax credit could be paid out in periodic payments starting this summer.
Per the legislation, tax filers can get an advance on up to half of the tax credit throughout 2021 in installments from July through December, and the remainder when they file their taxes in 2022. Filers will be able to opt out of the advance payments if they prefer to get the money as a lump sum when they file their 2021 taxes.
It also might be worth noting that the IRS is so overwhelmed that it’s yet to finish processing millions of tax returns from 2019-2020.
IRS Commissioner Charles Rettig has signaled these advances will be paid out monthly. For eligible parents with children under the age of six, that could be a monthly payout of $300 from July through December, and $250 for children 17 to six.
According to Kathy Pickering, H&R Block’s chief tax officer, “In the past, you just claim the credit and you got it in your refund. Next year, you’ll be reconciling how much you got in advance, and how much you’re entitled to, so that you get the remainder of what you’re due on your tax return.” — And yes, at the end of the year it means even more work for the under funded and under staffed IRS.
Information also has it from Charles Rettig at a recent Senate hearing, that the IRS is setting up an online portal for qualifiers to be able to opt out of the advanced payments and update key information (including their marital status, change in income, or number of children). It should be available in July.
There are still a few unknowns about the yet-to-be-released portal. Kathy Pickering says it’s not clear if taxpayers will be able to update their bank information via the portal. It is also hoped that the IRS portal will include the option to change direct deposit information.
When the portal becomes available, it’s suggested that you update any important information like a change in marital status, a dramatic change in income, and, obviously, a change in the number of dependents. Also, “if someone hasn’t yet filed (their 2020 taxes), and they think they might be eligible for this payment, it might be in their best interest to get their tax return filed as quickly as possible,” according to Pickering. (The tax deadline this year has been extended to May 17.)
When will the child tax credit start to go out?
According to IRS Commissioner Rettig, the agency expects to start sending out monthly payments in July. Rettig said at a recent Senate hearing that the IRS was working to have the portal up and running by July 1.
Who qualifies for the child tax credit?
Much like the stimulus payments sent out to millions of Americans, the 2021 child tax credit comes with new income cutoffs, too.
Single filers making up to $75,000 per year in modified adjusted gross income, heads of households making up to $112,500 a year, and couples filing jointly making $150,000 or less per year can qualify for the full credits. Above those income levels, the payments would phase out by $50 for every $1,000 in income over that limit, per the stimulus bill.
Even if you don’t qualify for the new 2021 child tax credit based on your income, you could still qualify for the original $2,000 tax credit. Single filers making up to $200,000 of modified adjusted gross income and couples filing together making up to $400,000 can qualify for $2,000 per child.
Will your child tax credit come via direct deposit or mail?
It’s not clear yet how the tax credit advances will be distributed, but it’s expected they’ll be sent in a similar fashion as the stimulus checks via direct deposit for those who have it set up, and mailed checks to those with no bank on file with the IRS.
Pickering said that “we are still waiting to hear more specific confirmation but we’re using the model that they use for the stimulus payments. So that’s what we’re expecting that the IRS will do.”
Will it reduce your 2021 tax return?
If you received the correct amount of advance payments, it will not reduce your tax return. The expanded child tax credit is a fully-refundable tax credit. If you owe money when you file your 2021 taxes, your bill will be reduced by the amount you qualified for — or if you are due a tax return, that return will include the child tax credit amount.
If you were issued more money than you qualified for in advance payments of the child tax credit, it’s possible you may have to pay back some of the money, which would either be taken out of your tax return or added to your bill if you owe money to the IRS.
Families will have the choice if they’d rather get a lump sum when they file their 2021 taxes next year. Pickering suggests meeting with a tax advisor to evaluate and make that “personal decision.”
Do you have to pay the child tax credit back?
The child tax credit is a fully refundable tax credit, so you don’t have to pay it back.
Importantly, though, it is possible you may end up owing some of the money if you erroneously received more in the advance payments than you qualified for or ended up being ineligible in 2021.
That could be the case if you had a sudden increase in income in 2021 or if your tax information was outdated (for example, you had a marital status change or a change in the status of a child this year). In that case, experts say, you could find yourself with a tax bill come tax filing season in 2022. You may then have to pay what was owed through either a smaller refund or a higher tax bill.
There is a caveat, however. For lower-income families, the legislation bakes in a “safe harbor,” where even if you owed part of the credit back, filers would not be on the hook for up to $2,000 per child of that amount, provided they fall into certain income categories. Those limits are $40,000 for single filers and $60,000 for joint filers, with phase outs above those levels as well.
Will the new child tax care credit become permanent?
Unless Congress acts, this $3,000 (or $3,600 for those six and under) child tax credit will revert back to $2,000 per year starting in the 2022 tax season.
This whole tax credit thing could be an easy boon for parents. Not real sure about the kids though, as most never really ever get to see the money as it might relate to them. The big winners by a larger number won’t be the kids or the parents as much as it would be for corporate America. There will be lots of folks upgrading or otherwise purchasing new smart phones, and we certainly can’t rule out all of the new big screen TV purchases either. With the failure of our public education to teach real economics in this country, people in general usually won’t spend the money for what the government says it’s presumably for.
As an aside, there are a few responsible parents out there however, that will apply the extra tax credit funds to their kids, but there aren’t enough responsible parents out there to even make a dent in child poverty over all.