There's a new child tax credit in town, worth up to $3,600 per kid. How much you'll pocket depends on your kid's age and your income. Half of the credit will be paid out in monthly installments through December 2021 – unless you tell the gov 'no thanks.' You'll get the rest – plus any money you've deferred this year – in 2022 when you file your tax return.
A lot of people have Qs about the finer details. So we asked tax attorney Kelly Phillips Erb, host of "Taxgirl Podcast," to help clear things up.
Why would someone opt out of the monthly payments?
If you don't need the monthly payments and you're not sure if you're entitled to the full amount [you're receiving], opting out is smart. You won't lose the credit, so you can just get a bigger payout at tax time next year. Some folks just like receiving a lump-sum refund. Another reason [to opt out]: if you get too much credit from the advanced payments, you may have to pay it back.
Why would I get too much credit?
Most taxpayers should have received the right amount. But the IRS is sending payments based on information provided on your 2019 or 2020 tax return – or information you included when you registered using the non-filer tool. So if you’ve made a life change, like moving outside of the US or changing your filing status, that can impact your payments. If your income has gone up…or if the number of children you claimed has gone down (due to age, custody or other arrangements), the advance payments may be higher than what you’re actually entitled to receive.
And I might have to pay back the difference?
Yes. When you file your tax return in 2022...you’ll calculate the difference between what you should have received and what you actually received. Credits are dollar-for-dollar reductions in tax owed. So if you didn’t receive enough, the IRS will pay you the difference. If you received too much, you’ll have to pay the IRS [back] by writing a check or offsetting your refund.
But there is some wiggle room. If you get a little too much credit, the IRS will give you a break in the form of a "safe harbor" of up to $2,000 per qualifying child for families reporting less than $40,000 for individual taxpayers (or $60,000 for married taxpayers filing jointly or $50,000 for taxpayers filing as head of household). You can use that safe harbor amount to offset any overpayment. For families who earn more, there’s still some protection, but [income] phaseouts apply.
Tell me more about phaseouts.
That means as your income goes up, the amount of the credit goes down until it disappears completely...You’re entitled to the full credit if [your adjusted gross income, or AGI] is below $75,000 for individual taxpayers ($150,000 for married taxpayers filing jointly or $112,500 for taxpayers filing as head of household). As that number increases, the amount of the credit is reduced.
And since this is tax – and tax can be complicated – there’s a second phaseout. The credit is reduced below $2,000 per child if your income exceeds $400,000 for married taxpayers filing jointly and $200,000 for everyone else.
What if I expect to make more than that in 2021?
If you are receiving monthly payments and your income goes up enough to make you subject to the phaseout, consider opting out. The deadline to unenroll is three days before the first Thursday of next month by 11:59 pm ET. You do not need to unenroll each month. Both spouses must enroll to stop the payments. If only one spouse unenrolls, you’ll still get half. Keep in mind that if you unenroll and change your mind, you won’t be able to re-enroll until late September.
What happens if parents are not married but share custody?
The normal child tax credit rules apply. If you alternate custody and you aren’t entitled to claim your child in 2021, you may want to unenroll so you don’t receive an overpayment.
What if I just had or adopted a kid this year?
There’s no way to tell the IRS that your circumstances have changed – yet. The IRS intends to update its portal to allow you to make certain adjustments, like adding a child. That would allow you to get more money in the form of the advanced child tax credit (aka those as-you-go payments). If you aren’t able to make the updates online, you can make the adjustment on your 2021 tax return when you file in 2022.
Is this how it'll work in 2022 and beyond?
No. The expanded child tax credit is only in place for 2021. After this year, unless Congress acts, things will go back to the 2020 treatment.
Psst: This interview has been edited for length and clarity.
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