What is the Child Tax Credit?
Eeeeek - we're hearing so much lately about the Child Tax Credit, due to go into effect July 15th. But what is it? Sure it's money, but is it 'free' money? There are many things you may want to know, and we turned to CityMom Victoria for all the answers.
Hiiiii Victoria. First, what is your background?
I am the Operations Manager at Fiscal Tax Company, a locally owned tax business in central Indiana that has been operating since 1974. I am also a Registered Tax Return Preparer. While I have been in this position for 6 years, I have been doing taxes on and off since I was 14 years old. It's kind of a family business, as my dad is a retired corporate accountant and currently working for me as a tax preparer, and my brother has worked in the tax industry as well.
Explain this to me like I’m 5: What is the Child Tax Credit?
The Child Tax Credit is a credit for taxpayers with dependent children that reduces a taxpayers' tax liability. The income limits for this credit change based on your filing status (for 2021: $75,000 if you file single; $112,500 if you file Head of Household; and $150,000 if you file jointly). After those income limits, the credit begins to phase out. This is not a new credit, but it is changed for the 2021 tax year. For reference, the credit is usually $2000 for children 0-17. Another change this year is that for 2021 the credit is fully refundable, whereas before only $1400 of the credit was refundable. This means that if the entire $2000 credit was not used to reduce your tax, then you could receive up to $1400 as a refund.You can find out how much credit you received previously by checking line 19 and line 28 of your 2020 tax return.
When is it due to go into effect and how?
Payments will begin on July 15 and will be paid out on a monthly basis. If you received a refund on your 2020 taxes that was direct deposited, you should receive your payments to that account. If you owed taxes or received a paper check for your refund, you will receive either a paper check each month or possibly a prepaid debit card. The IRS will also have a portal to update bank account information so that you can receive the payments via direct deposit.
How much will I receive?
The advance payments are equal to 50% of the child tax credit for 2021. For children 5 and under, the total child tax credit is $3600 for 2021 and for children ages 6-17 the child tax credit is $3000. Therefore, the monthly payments will be $300 for children 5 and under and $250 for children 6-17.
Will it effect my 2022 taxes?
This will affect your 2021 taxes that are filed in 2022. This is currently a one-time change that will revert back to the previous rules after 2021. However, there is a proposal to extend this credit through 2025 and make it permanently and fully refundable.
Do I have to pay it back?
If you receive the advanced payments for the Child Tax Credit - and then do not claim the child on your taxes - yes, you will have to repay the credit. This is especially important for unmarried parents who claim child{ren} on an every other year schedule. If you claimed the child{ren} on your 2020 taxes, but someone else will be claiming them on their 2021 taxes, you will want to opt out to avoid having to pay back the advanced payments.
How do I opt out?
To opt out, you will need to set up an irs.gov account. You can also do it through ID.me, but that is a lot harder and more complicated! An irs.gov account can be set up in about 5 minutes and will allow you to opt out quickly. Once you sign into the account, there will be a link at the top that will take you to the portal. If you already have an irs.gov account, or want to use the ID.me service, you can go directly to this link.Keep in mind that if you file a joint tax return, both taxpayers will need to opt out! (If you do not have both taxpayers opt out, you will receive 50% of the advanced payments.)
Do I want to opt out?
I cannot answer this question. As a tax professional, I can give you the information but I can't legally advise you one way or the other. It's also a highly personal choice based on your tax situation. However, if you are in a situation where you would have to pay it back, I would highly advise you to opt out. If you are unsure what to do, contact your tax preparer and ask them to run a projection or tax planner for you.
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