Many taxpayers have begun receiving monthly payments as a result of the expanded child tax credit for 2021. What many people don’t know is that those payments are NOT just extra stimulus money. I want to answer a few important questions about the Child Tax Credit (CTC) and what you should do about it.
Why Does It Matter?
First of all, if you have dependent children – this affects you, and the CTC payments are NOT just extra stimulus money. That means, if you don’t take the appropriate action, you could end up owing more tax!
What is the CTC and What Does it Mean It’s “Expanded?
Put simply, if you have qualifying dependent children ages 17 or under, the CTC qualifies you for a credit to offset taxes due. This is not a new credit, but it is different for the 2021 tax year. For most taxpayers it’s a larger credit, and it’s paid partially in advance beginning July ’21 and finishing December ’21.
Who’s Eligible and How Much is the Credit?
Eligibility for the credit is based on having qualifying dependent children. Furthermore, the amounts are based on the income you reported on your most recent tax returns. The maximum credit is $3,600 for children ages 5 and under and $3,000 for children ages 6-17. Those amounts do phase out for high income earners.
What Should You Do?
First of all, you need to know how this affects your family’s tax situation. The payments you receive in advance will be reconciled with your 2021 tax returns. That means many people who don’t take action will owe more than they thought.
An example may be helpful: Let’s say you’re a family that was eligible for the credit based on your 2020 income, the IRS will be sending you advance payments. But then imagine the income you earn in 2021 makes you ineligible – You WILL have to pay back the amount you received in advance.
Depending on your tax situation, you need to update your withholdings or even opt out of the advance payments.
Links to the IRS Child Tax Credit FAQs are here, as well as the IRS Child Tax Credit Update Portal where you can opt out of the advance payments.
[Jeremy Sharp, financial planner and owner of Redeem Wealth, a faith-driven wealth management firm, is passionate about the colliding worlds of faith and finance. His family of five are active in their neighborhood church, where he also leads the worship team. Jeremy and his wife Grace are passionate about the foster care crisis and support organizations that bring awareness to how people can love and support underserved adults and kids in their local community. Contact: Jeremy@Redeemwealth.com
Life Thoughts Today 