How to Avoid Having to Return the $ 3,600 Child Tax Credit
This year, US parents are eligible for a tax credit of up to $ 3,600 per child – up from a $ 2,000 cap last year – and half of that amount will be sent as a monthly check starting in July. However, since these checks are actually an advance based on taxes on your current income (as opposed to what you earned last year), you may need to get some of the money back if your finances improve in 2021. Here’s how you can avoid it.
How does the child tax credit work?
In tax year 2021, families are eligible for a full credit of $ 3,600 for each child under the age of six and $ 3,000 for each child over 6 but under 18 if they earn less than $ 150,000 per year as joint applicants (or $ 75,000). for single parents). Families earning more will see the tax credit phase out at a credit rate of $ 50 on $ 1,000 of income above the WSJ threshold.
Dependent children aged 18 and dependent students aged 19 to 24 are also eligible, but only for $ 500 per CNET . Half of the tax credit will be sent as a monthly installment spread between July and December, and the other half must be requested as part of the 2021 tax return.
Why should I return the money?
Since the advance payments were signed midway through the tax season, the IRS uses your 2020 tax return (or, otherwise, your 2019 tax return) to estimate what your 2021 income might be, and then bases your checks. On this. The problem is, your finances may have changed already, or will change later in 2021. For example, you might have a new child in 2021 and are eligible for an additional $ 3,600 – in this situation, you can at least claim this on your 2021 tax return. On the other hand, if your income rises significantly from 2020 or 2019 (if you haven’t filed your 2020 tax return), it could reduce the amount of tax credit you are eligible for, or even disqualify you. obtaining a loan. And since you’ve already received those automatically allocated monthly payments, this could mean paying thousands of dollars to the IRS next year.
How can I avoid this?
Advance payment legislation includes some protection against overpayment for tax filers. According to CNBC , one protection protects low-income recipients ($ 40,000 for individual applicants, $ 60,000 for joint applicants) from having to refund a $ 2,000 overpayment, provided the error is due to net changes in the number of eligible children. … (That is, a child you declared a dependent in 2020 will not be claimed as a dependent in your 2021 taxes – perhaps because your 21-year-old dropped out of college, for example.)
Another regulation directs the Treasury Department to set up an online portal that allows you to update your income throughout the year, as well as the number of your children and marital status ( according to CNET , it is not yet clear if you can change your address. Or payment method, such as direct deposit) … The idea is that the portal, which is slated to launch on July 1, will allow you to update information as needed to avoid surprises when filing your 2021 tax return.
Ideally, you should report any adjustments to your income prior to receiving subsequent checks, but this is not possible until the portal is launched. For now, and as it will be easily forgotten by the time July hits: set a calendar reminder for July 1st with specific instructions to immediately log into the online portal and update your income information. ( According to CNET , the portal will also allow you to opt out of receiving extended checks if you’d rather ask for the total on your 2021 tax return, so that’s an option, too.) As April Walker, lead manager of tax practice and ethics at the American Institute of Certified Public Accountants, told CNBC:
“I would advise taxpayers to pay attention to when the portal is available. And think about what might happen in 2021 that might affect the amount [of the loan]. ”