Back to school sales should get a boost after millions of families banked their first monthly advance for the child tax credit in July. Another monthly payment is around the corner come Aug. 13, too.
But before you throw an extra pair of sneakers or a high-end backpack into the cart, pay attention to the fine print.
Did you know, for example, that some people will be stuck paying back the money next year if they received more than they’re actually qualified to get each month from July through December? Others could be looking at a much smaller tax refund than they might typically expect.
We could hear from a lot of angry taxpayers once the 2022 tax filing season begins when those expecting extra-large tax refunds end up with a much smaller payout — or even owe money.
The tax rules relating to the child tax credit are different from the last three stimulus payouts where some people might have received extra money and didn’t have to pay it back if they no longer qualified based on income or some other factors.
“The IRS has been clear this is an advance payment and if you’re no longer eligible it will be repaid with 2021 tax filing,” said James O’Rilley, CPA and tax director for Doeren Mayhew in Troy.
The monthly rollout of money is an “advance” of what the IRS estimates you’re qualified to get based on your 2019 or 2020 income tax return, depending on which return has been processed so far by the IRS.
But how much you qualify to receive for the child tax credit ultimately will be calculated based on your 2021 income and situation when you file a return next year. Some repayment protection exists for some who have limited incomes.
Now, it’s vital that people keep accurate records of what they received and when, O’Rilley said.
In January 2022, the IRS will send out what it calls a Letter 6419 to provide the total amount of advance child tax credit payments that were distributed to you this year.
Much like with the stimulus payments that applied to 2020 returns, you’re going to need to match up what you’ve already received to what you’re owed.
If you do not reconcile advance payments, O’Rilley warned, it can delay processing your tax return after that’s filed next year, delay refunds, or change a refund into a balance due.
While the message is out there, we all know that many people simply aren’t focusing on next year’s taxes in July and August. But some will be sorry if they don’t.
Beginning in July, millions of eligible families began receiving up to $300 per month for each qualifying child ages 5 and younger and $250 per month for children ages 6 to 17. The monthly payouts run from July through December.
If your child ages out of the credit in 2021, the IRS is expected to make some adjustments on its own. But tax experts say you might want to track that, too. The IRS won’t include a child who turns 18 in 2021 in your advance payment. And the IRS is expected to adjust the payment to $250 instead of $300 a month for a child who turns 6 this year.
Thanks to an expanded child tax credit, those who qualify and have an eligible child ages 5 and younger could see their credit increase from $2,000 to as much as $3,600. About half that money would be paid in 2021 and the rest when tax returns are filed in 2022. Income limits will prevent some from receiving the credit.
Families can opt out of the payment. You can opt out of the September payment as long as you meet an Aug. 30 deadline.
The IRS will also let you opt out of future payments, but the final deadline is Nov. 29. If you wait that long, you’re only opting out of the December advance payment.
Who wants to opt out?
Alison Flores, principal researcher at The Tax Institute at H&R Block, said there are essentially two reasons someone would decline a chance to receive hundreds of dollars of month this year.
One, you depend on a big tax refund each year and you don’t want any money in advance. You may be more concerned about getting as big of a tax refund as possible next year instead of getting extra cash now.
Two, your situation isn’t exactly the same as it was last year — and you could end up having to pay some of this advance payment back or face a smaller refund next year.
“Depending on your situation, opting out could help you avoid receiving payments that may need to be paid back,” Flores said.
Families need to review their own finances, including talking to their tax professionals, to decide whether they want to keep receiving monthly payments for the child tax credit or opt out of future payments.
H&R Block created an online resource that includes a calculator to estimate payments. The IRS has child tax credit information at IRS.gov.
The IRS notes that families may also want to opt out if their main home was outside the U.S. for more than half of 2021 — and they would no longer qualify for the credit.
How do you opt out?
See IRS.gov and click on “Get Details on the Advance Child Tax Credit.” Then, check out the “Manage Payments” tool.
You’d use what the IRS calls its Child Tax Credit Update Portal to opt out from receiving the monthly payments.
“The IRS has been pretty clear. The opt out portal is not only up but it is being used,” said Mark Steber, chief tax information officer for Jackson Hewitt.
This is not a one-step, easy-peasy process. And frankly, you don’t want it so easy that the crooks find a way to get their hands on your child tax credit.
At the same time, though, there’s concern that some people won’t be able to easily opt out or they might give up after reaching the first roadblock or two. Take time to understand the process.
Many people may have to create a new account through ID.me if they’re not able to sign in with an existing IRS username.
The ID.me third-party system is also being used by dozens of states when it comes to verifying identities now for claiming unemployment benefits to combat fraud.
You need a phone whose account is in your own name — not the name of someone else. Having a smartphone, Steber said, will better enable the third party ID.me to send a text to you directly and speed up the process.
You also need things such as an email address, your Social Security number and a photo ID (driver’s license, passport, passport card, or state ID).
Flores notes that both spouses must unenroll separately if you use the married filing jointly status. If only one spouse unenrolls, she said, you’ll receive half of the payment.
You cannot re-enroll at this time, she said, but the IRS expects that functionality to be ready in late September 2021.
Tax experts also note that some people can adjust their tax withholdings on their paychecks, if they find the opt-out tool too overwhelming. Or others warn that you might want to set aside some of the advance payments — and not spend all that money now — to address possible tax headaches in April.
What could create some big tax headaches?
Are you sharing custody? Say you claimed two children as dependents in 2020 but your ex-spouse will be claiming the children on the 2021 federal income tax return, per your divorce agreement.
If so, one parent could end up pocketing the advance payments now but then end up having to hand all that money back to the IRS next year — unless that parent opts out. If you have two children ages 10 and 12, you could be looking at $500 a month — or $3,000 for six months — in advance payments.
If you are not the parent who will be claiming the children as dependents for 2021, you’re not going qualify for the child tax credit or any of the advance payments and you’re looking at paying that money back.
The risk of needing to pay that money back is higher when there are custodial issues, Steber said.
Are you making more money in 2021?
If you make more money this year than last year, you could qualify for a much smaller credit. And it’s possible that you’re receiving too much money early in the game.
Those who are gig workers or self-employed often have a tougher time estimating their tax bill — and many make estimated payments during the year. They might want to reconsider taking the advance child tax credit payments now. It may be even more important to review one’s situation here with a tax professional to avoid problems.
To receive the full credit as a single parent, for example, you must meet the requirements for filing taxes as a head of household and your income must be $112,500 or less.
Or if you are single and do not meet the requirements for filing as head of household, your income must be $75,000 or less.
If married and filing a joint return, you’d qualify for the full benefit if your combined income is $150,000 or less.
Smaller child tax credit payouts will be available for many families with higher incomes.
The basic child tax credit of $2,000 per child remains in place and begins to phase out at a modified adjusted gross income of $400,000 for married filing jointly and $200,000 for other filers.
The expanded credit for 2021 adds the extra money on top of the $2,000 for many families who have more modest incomes.
Steber said it’s helpful that the IRS is only paying out up to half of the possible credit, which essentially puts a cap on how much tax refunds could be reduced and how much money might need to be paid back by some.