Financial experts warn that while the Internal Revenue Service prepares to issue millions of monthly child-tax-credit payments to American parents, some of them may want to consider skipping the money now — or expect a tax bill later. The rules governing this year’s advance payments for the child tax credit, or CTC, may persuade parents who are close to the income eligibility limitations to opt out in order to avoid having to repay the money at tax time next year.
They may also have to think quickly. The first installments are due on July 15, and the deadline to skip the July payment is Monday, June 28. People who want to cancel their July payment have until Monday at 11:59 p.m. Eastern Time to do so. The deadline to avoid the August 13 payment is August 2, and the deadline to skip the September 15 payment is August 30. For the time being, someone who has opted out of getting money cannot opt back in. According to the IRS, the possibility to re-enroll will begin in late September.
“ ‘People should take a close look at this. They don’t want to be taken aback by an unpleasant surprise.’
Tobias Financial Advisors’ Marianela Collado
The full payments are available to single filers earning up to $75,000, persons earning up to $112,500 when filing as head of household, and married couples filing jointly earning up to $150,000. Parents who are currently close to those income thresholds should consider twice if they are getting raises or better-paying jobs this year that will put them out of income eligibility, according to the experts. Marianela Collado, co-owner and CEO of Tobias Financial Advisors, stated, “People have to look at this carefully.” “They don’t want to be caught off guard.” Last Monday, the IRS unveiled an online gateway via which households can opt out of receiving advance payments in monthly installments. This year’s child tax credit has some new rules. For decades, the credit has been paid as a single payment, incorporated into people’s tax refunds. In March, Congress passed the $1.9 trillion American Rescue Plan, which increased the payout amount and stated that half of the credit could be paid in six monthly installments. According to lawmakers and supporters, monthly expenses do not wait for tax refunds to arrive in bank accounts. For children under the age of six, the CTC amount has increased from $2,000 to $3,600 this year. Because half of $3,600 is $1,800, and $1,800 divided by six equals $300, parents of small children will receive $300 per month. The CTC award is $3,000 per child between the ages of 6 and 17, with parents receiving $250 each month. The income restrictions for receiving full payments are the same as the rules for receiving a stimulus check. However, there is one crucial item to remember: the IRS will decide eligibility and the amount of advance payments based on information from 2020 tax returns (or 2019 returns if 2020 returns are not yet available). However, these are still payments made ahead of time in order to receive a credit on a 2021 tax return. If, after accounting for a taxpayer’s income and family status, the 2021 return discloses an overpayment, the IRS will want the money back. The IRS has stated that the excess money will be deducted from a taxpayer’s return. The IRS says it can work out payment schedules for anyone who owe taxes, including the overpayment from the CTC.
“ ‘Why even take the risk if you’re afraid you’re going to strike the upper limit? ‘Just say no.’
Tobias Financial Advisors’ Marianela Collado
“Why bother take the risk if you’re afraid you’ll strike the upper limit?” says the author. Collado said, “Just opt out.” The worst-case scenario, she explained, is that she falls under the limit and receives the whole credit during tax season. Collado pointed out that if a person has to refund the advance money, there are no further penalties. According to Alvin Carlos, financial planner and managing partner of District Capital Management, a financial-adviser firm in Washington, D.C., someone who plans to repay the CTC advances could put the money in a savings account and earn interest before tax season. However, he cautioned that such a move is not appropriate for everyone. Carlos explained, “It’s basically the emotional impact of having to pay.” He intends to discuss bypassing the upfront payments with other clients, including one who has been out of work while raising the couple’s small kid but is now considering returning to work. You may be liable for payback if you earn too much money. People who have a shift in the number of claimed dependents from year to year may also choose to opt out, according to Jeremiah Barlow, head of family wealth services at Mercer Advisors. For example, divorced parents frequently rotate the years they designate their children as dependent for CTC purposes, he said. If a parent’s off year is 2021, Barlow advises them to opt out. If a couple is married and filing jointly, however, they must both opt out. He explained that if they don’t, they’ll still get half of the upfront money. Parents with older children who were declared as dependents in 2020 but will not be classified as dependents in 2021 should also consider opting out. Here’s where the IRS’s repayment protection guidelines could come in handy for those who didn’t account for as many dependents as they should have. Single filers who earn less than $40,000 on their 2021 tax return — $50,000 for heads of household and $60,000 for married couples — will not be required to repay any overpayment. Individuals earning $80,000, head of household filers earning $100,000, and married couples earning $120,000 lose their protections above those levels. How to forecast 2021 earnings now — and tax strategies to reduce them Part of a person’s issue in selecting whether or not to opt out of the payments may be anticipating how much money they’ll make in 2021 with only six months to go. According to Barlow, there are a couple of techniques to make an educated guess. The first step is to examine the most recent tax return. (The “modified adjusted gross income,” which the IRS is seeking for, may be found on Line 11 of Form 1040.) Another option is to hire a tax specialist to estimate your income and tax liability for 2021. There’s also the “back of the napkin” method, which involves totaling up earnings from W2s and other income-related paperwork such as 1099s on a piece of paper. The standard deduction can then be subtracted from the total. (This year’s amounts are $25,100 for a married couple and $12,550 for singles.) In addition, the IRS has established an online tool to assist people in determining their eligibility. The URL can be found here. What if someone is on the verge of exceeding the income limitations but is dead set on receiving advance payments? According to Barlow and Collado, this is where tax planning comes into play. Increasing 401(k) contributions is one method to achieve so, which will cut taxable income. The maximum contribution is $19,500. Contributions to an IRA can also lower adjusted gross income, although deduction regulations can be complicated and have limitations based on marital status, salary, and access to a workplace retirement plan. Collado advised, “Your best bet is really to go all in on the 401(k) to minimize that number,” referring to AGI. Contributing to a health savings account, which can similarly cut adjusted gross income, is another option, she said. HSAs can be used by people with high-deductible health insurance who contribute up to $3,600 for individual coverage and $7,200 for family coverage. Walking away from money can feel like a significant step, but Barlow stressed that anyone can opt out of the advance CTC payments at any time. “There’s plenty of time to plan,” he added of potential tax options. Also see: Some families may be required to repay their child tax credit — There are four major differences between stimulus checks and other types of tests. On June 28, this story was updated.
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