- Max Child Tax Credit now $3,600/child under 6; $3,000 ages 6-17
- Even high-income families will receive 50% advances on these credits
- Advance payments can increase your tax bill next year, all else equal
If you take a vacation in the middle of this month, you may come home to a surprise check in the mail. Beginning July 15, households with children 17 and younger will receive advance payments of their estimated Child Tax Credit. When Congress passed the American Rescue Plan this March, they expanded the amount of the Child Tax Credit and authorized advance payments of 50% of your expected credit. We are here to break down the changes and discuss the implications for your household.
Old vs New Credit- Buckle Up!
Congress has a great talent for making legislation complicated. They doubled the old $1,000 per child tax credit to $2,000 in 2017. Now they’ve added an additional “temporary enhanced credit,” taking the max per child to $3,600 under age 6 and $3,000 for ages 6-17. The two amounts- normal and enhanced credit- come with two income phaseouts that adjust with the number of kids in the household. Why would Congress do this? Those in the know will say it’s easier to pass a temporary change due to budget constraints; I say they like giving financial planners an opportunity to build a spreadsheet!
Takeaway: Families are now eligible for maximum credits of $3,600 per child under 6, and $3,000 per child aged 6-17.
The enhanced credit came with a mandate for the Treasury to pay out 50% of the total Child Tax Credit throughout the year, up to $1,800 for children under age 6 and $1,500 ages 6-17. Since it took some time to organize this effort, checks will run from July-December this year, meaning checks up to $300 or $250 per child. These payments are based on your 2020 Adjusted Gross Income (AGI). Two phaseouts begin at $75,000 and $400,000; CNET has a great calculator² showing both your expected credit and expected payments.
Not Free Money
While the Child Tax Credit is refundable and was designed as a boon to low income households, if you have a tax bill this is not free money. Instead, it’s an advance of your estimated credit based on last year’s income. We foresee some potential surprises we would like our clients to consider. Every dollar you receive in advance credit is a dollar you’ll either pay in tax next spring or a dollar less you’ll receive as a tax refund. Furthermore, if you make electronic tax payments, your advance credit will come via direct deposit; you may not notice it. Finally, if your 2021 income is larger than 2020, the IRS will overestimate your tax credit and exacerbate this problem.
Takeaway: Any advance check you receive increases your tax bill or reduces your refund next year.
Your Action Plan
Our hope is that you are aware of how advance payments can affect your tax bill; nothing is as frustrating as a surprise payment come next spring. You can estimate your payment at CNET and opt out of payments using a somewhat cumbersome IRS website. Otherwise, if you receive advance payments it is a good idea to earmark those toward 2021 tax payments. What about next year? Congress only authorized this plan for one year, so we’ll all wait and see if it becomes permanent.
- R. 1319 American Rescue Plan
- Advance Tax Credit Calculator via CNET
- IRS: Manage Advanced Payments