For most U.S. parents, July brought a letter from the White House and some extra padding in the bank account—up to $300 per child. The advance Child Tax Credit payments are meant to help offset some of the costs of supporting a child, providing monthly installments through December instead of a tax season benefit in April.
And while the monthly payments are welcomed by many parents, especially those who would not previously have qualified for the Child Tax Credit, or those struggling financially during the pandemic, there are some tax considerations to be aware of.
We’ve heard from many clients asking if it’s smart to opt out of the payments this year, instead claiming the full Child Tax Credit after filing their 2021 returns. The answer depends a lot on your financial situation and, to some extent, your personal preferences. It may be helpful to run a tax projection or even just give us a call if you’re in any of the following situations:
You’re a single parent who shares custody
If you and your kids’ other parent share custody and take turns claiming the children on your returns, you may need to opt out or face the prospect of repayment next year. If you claimed the kids on your most recent return, the distributed payments will automatically land in your bank account. That could be an issue if the other parent plans to claim the kids on his or her 2021 return.
You’re a high earner or you’re earning more this year
Your Child Tax Credit is based on the previous year’s tax return. Single filers with an income of $75,000 or less can claim the full credit (or married joint filers with income of $112,500 or less or $112,500 for head of household filers). The payments are scaled back incrementally for higher incomes, eventually phasing out altogether.
If you’re a high earner, you may want to check your withholding to be sure you don’t end up owing more than expected. If you’re earning more than last year, you may receive more than you’re eligible for, meaning you’ll have to pay back half a year’s difference when you file—an unwelcome surprise come tax time.
If you pay quarterly estimated taxes, your estimated payments and the Child Tax Credit may end up canceling each other out. It’s also possible that you could end up owing more taxes when you file. A tax projection can help you gauge your likely earnings and determine if accepting the distributed payments makes sense.
For some folks, the choice also comes down to their preferences—a full payment once a year, or a distributed monthly amount. If you decide to opt out, it’s simple to do so through the IRS Child Tax Credit Update Portal. The deadline to opt out for September payments and beyond is Aug. 30.
Give us a call if you’d like to talk more about your unique tax considerations.