Last year marked many obstacles for families, businesses and individuals because of the Covid 19 lockdowns and mandates. The government responded with stimulus money that caused interesting issues when it came to tax time. The stimulus money was not considered income nor was it required to be paid back. However, the advanced child tax credit authorized through the American Rescue Plan is a little different. The money coming to American families in the form of a monthly payment will need to be addressed before tax time to make sure that your tax filing goes smoothly. Issues and surprises can occur because this monthly payment is not like the stimulus money, in that, the monthly payments are a “true” advance on a tax credit you are getting come tax-filing time.
It is money you would be getting normally when you file your taxes but it is being sent to you in advance. The child tax credit was increased and expanded but it does not necessarily mean it will not affect you come tax time. There are fail-safes in place for certain individuals that fall into income categories but some may be surprised when they have to pay some of the credit back or find themselves owing more taxes when they file. Generally, the advanced child tax credit is 50% of what you would receive come tax time divided out in monthly payments between July and December 2021.
The caution here is if you normally receive a $3000 refund every year and you take the advance in monthly payments that amount to $2000 you may only get a $1000 refund when you file your return. This means the advance will potentially reduce your refund by how much you receive between July and December. It is also possible if you receive too much and do not fall within the income guidelines to get a “pass” you may have to pay some of it back.
The tax laws have been fluid when it comes to Covid responses so they could change again to alleviate paybacks and other issues that may come of the advance. However, it may be best to plan ahead to make sure there are no real surprises when you go to file your tax return for 2021.
Some of the issues that may affect how this advance will affect you:
- Dependent lived with another parent
- Dependent aged out of child tax credit in 2021 but IRS has old information
- Your income changed in 2021
- Your filing status changed in 2021 (ie single to married)
- Your dependent claims themselves in 2021
- You are separated or divorced and share dependent exemption every other year
If any of these situations could or do apply it would be a good idea to consult us about how your advance will affect you come tax time.