By now, you’ve probably received a letter from the IRS, informing you of disbursements being made to families via the 2021 Child Tax Credit. This is part of the American Rescue Plan Act that was signed into law by President Biden on March 11th, 2021. While there are several new features to this tax credit, many business owners are asking if they should accept the disbursements or unenroll. In today’s entry, I’m going to take a closer look at the 2021 Child Tax Credit and how business owners may choose to respond.
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Before we really dig into the meat of today’s subject, I want to clarify the difference between a credit and a deduction. Both can have a favorable impact on your overall tax bill. However, when it comes right down to it, tax credits have rock star status. You see, where a deduction simply reduces your taxable income, credits decrease the taxes you owe. In addition to decreasing your taxes, credits are often refundable. This means that, if the amount of the credit is larger than the amount of taxes owed, you receive a refund for the difference. Such is the case with the new 2021 Child Tax Credit. So, what’s new about this year’s version of the Child Tax Credit?
For starters, the IRS is going to disburse 50 percent of each families’ total 2021 Child Tax Credit via monthly installments. What does that mean? Because the Child Tax Credit actually rose from $2,000 per eligible child from 6 to 17 years of age to $3,000, and $3,600 for each child younger than 6, your numbers will look a little different. Let’s say you have 2 children. One is 5 years old and the other is 11. Under the new Child Tax Credit, you would be eligible—depending on your income, 2019/2020 filing status, etc.— to receive a total credit of $6,600. With this disbursement plan, the IRS would calculate half of your total credit ($3,300) and divide that into 6 monthly payments of $550.
Additionally, there is an income threshold to consider. Families who are ineligible for the $3,000 or $3,600 credits in 2021, but have modified Adjusted Gross Incomes (AGIs) at or below $400,000 on joint returns or $200,000 on other returns, could still claim the regular credit of $2,000 per child, minus the amount of any advance payments they received. On the other hand, families with modified AGIs above the $400,000/$200,000 thresholds could see the $2,000 credit reduced by $50 for every $1,000 (or fraction thereof) of modified AGI over those thresholds.
Any time there is a major change to the Internal Revenue Code (IRC), people are going to have lots of questions. I’m going to try to answer a few of the more common ones right now. Just like the stimulus payments from 2020 and early 2021, in most cases, you won’t need to do anything to begin receiving your advanced Child Tax Credit. However, if you haven’t filed your 2019 or 2020 tax filings, you will need to take advantage of the IRS’s new Non-Filer Tool. It allows individuals who weren’t required to file to file a simplified tax return, allowing them to register for advanced Child Tax Credit payments.
If you need to update your information from your 2019 or 2020 tax filings, you may do so on the IRS.gov website. There you will be able to update your bank information, address, and any changes to your dependents, marital status, and more. In January of 2022, the IRS will send out Letter 6419, detailing the total amount of your advance Child Tax Credit payments. Hold on to this letter! You may need to refer to it when you file your 2021 tax return during the 2022 tax filing season. Although the payments aren’t taxable, you may have to repay the excess amount on your 2021 tax return during the 2022 tax filing season, if the total is greater than the Child Tax Credit amount that you are allowed to claim on your 2021 tax return.
If your child doesn’t have a Social Security number, you will not receive a Child Tax Credit. To qualify, you must put your child’s name, date of birth, and valid Social Security number on Form 1040. Payments begin on July 15th and will follow on August 13th, September 15th, October 15th, November 15th, and December 15th.
Ultimately, this depends on your individual situation. As with any financial decision, consult your financial advisor and tax planner first. However, I have chosen to go ahead and accept it. I’m just going to place it into a savings or retirement account and let the payments go to work for me. It’s possible that I will end up having to pay some of it back but I think the majority of people will probably do something similar with the advance. You might end up paying some of it back but in the meantime, do something productive with it.
This is complicated stuff. It’s why you need a team around you. It’s why I have a team of advisors around me. Don’t put yourself on an island. If you don’t have a team of rock star advisors and tax planners, reach out to me. My team and I deal with this on a daily basis. We see the frustration and stress that our business owner clients carry with them when dealing with things like this. Candidly, I’ve carried it on my shoulders too. But that’s why I’m so passionate about helping business owners make sense of complex situations.
Friends, life is hard but life is good! Taxes can be frustrating but with the right advisors, they don’t have to be. Reach out to my team and together, we can make each day, at least, Financially Simple!
If you have more questions about this or other business and financial topics, contact us for a free consultation. Also, the Financially Simple team is excited to announce that Justin’s second book, Your Baby’s Ugly, is now available in print, audible, and e-book versions. Get your copy and start turning your ugly baby into an attractive and valuable asset, today!