Why you may want to opt out of the monthly Child Tax Credit payments
Families will receive the monthly child tax credit (CTC) prepayments next month, but some parents may want to forego it.
Those who owe money to the Internal Revenue Service, have increased their incomes significantly this year, or recently filed for divorce should consider opting out of monthly payments, according to experts.
Read more: Here are three tax tasks for newly married couples
"Unlike the economic impact distributed last year, if too much is given, child tax credits have to be paid back," Dennis Linden, CBIZ MHM's accountant and Northeast Ohio director, told Yahoo Money . "It can be a very uncomfortable awakening in April 2022 when the 2021 tax return is filed."
The $ 1.9 trillion American Rescue Plan, passed in March, provides a one-year extension to the CTC that increases the loan amount and allows it to be distributed in regular prepayments. Families can now opt out of monthly payments through The Child Tax Credit Update Portal and instead receive full credit after filing their 2021 tax return.
US financial check. Used for tax refunds and also for the Covid-19 / Corona Virus stimulus payments in 2020
"You may owe taxes next year"
Households eligible for the CTC will receive half of their total balance in 2021 as a prepayment over the next six months from July 15 to December. However, if you normally owe Uncle Sam taxes and use the CTC to settle your debts, half of your 2021 balance as a prepayment in April 2022 could mean a higher tax burden.
“The child tax credit has typically been used, until now, to reduce a taxpayer's tax liability at the end of the year,” David Flamer, CPA and president of David R. Flamer of An Accountancy Corporation, told Yahoo Money. "They may forget that the credit usually pays part of the taxes associated with their work and they might owe taxes next year."
For 2021, the amount that parents can claim is also higher, so families are likely to get more credit for the tax year. In 2021, taxpayers can claim a maximum of $ 3,600 for children under 6 and $ 3,000 for children 6-17 years old. Previously, the maximum tax credit was $ 2,000 per child under the age of 17.
"If your income exceeds these thresholds"
If your income exceeds the income thresholds for CTC this year - maybe you get a new job or a big promotion - you might want to opt out. Selling real estate in 2021 and other income gains can also change your eligibility for the loan.
A submitter with children under 17 who earn up to $ 75,000 will receive full payment for each child, while those who earn up to $ 90,000 will receive a reduced amount. Joint applicants with children earning up to $ 150,000 will receive full credit, while those earning up to $ 170,000 will receive a lesser amount.
Read more: The 10 Most Common Tax Mistakes - And How To Avoid Them
Single filers who exceed these thresholds but up to $ 200,000 and joint applicants who earn up to $ 400,000 are eligible for the legacy credit, which is $ 2,000 per child under the age of 17.
The amount of the credit is specified in the 2020 tax return. If this return is not available, the IRS will use their 2019 return.
"If their income exceeds these thresholds, they would not be able to claim the loan," said Flamer. "You would have to repay the prepaid loan amount."
House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Chuck Schumer demonstrate the American Rescue Plan during the enrollment ceremony following the passage of the $ 1.9 trillion Coronavirus Disease Act (COVID-19 ) by US President Joe Biden on Capitol Hill in Washington. USA, March 10, 2021. REUTERS / Erin Scott
"Look at these dependency requirements"
Divorced parents need to be careful with prepayments and may consider opting out of the program. The prepayment goes to the parent who used the child on their return in 2020 or 2019. If the situation has changed, that parent may owe money to the IRS.
"You need to be able to claim your child as an addict," Lisa Greene-Lewis, TurboTax CPA and tax advisor, told Yahoo Money. "They have to do more than half of their support, and they have to live with you for at least half of the year, so you have to look at those addiction requirements as well."
If your primary residence was outside of the United States for more than half of 2021, you may also need to repay the prepayments received.
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A reason not to log out
You may be tempted to opt out of payments if you worry that the IRS is paying you more than you are entitled to. But that is not necessarily the case.
You may not have to repay the money if you earn less than $ 40,000 as a single applicant or $ 60,000 as a joint applicant, according to a safe harbor rule included in the American rescue plan. But if your income exceeds these thresholds and the IRS has sent you more than it should, you may need to send a check to the federal government next April.
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova
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