Child tax credit: Exciting adventure or perilous journey?
Most families would be wise to accept the monthly payments, but some exceptions exist
GYPSUM — Carla Whirley is a taxidermist, not to be confused with a tax specialist.
But with more people hunting during and following the pandemic, business is good, and she’s taking a second look at accepting the monthly payments available to her as a mother of two under the recent expansion of the child tax credit.
In 2021, as a result of the American Rescue Plan’s Child Tax Credit, families will be allowed to claim a $3,000 tax exemption per child, up from the $2,000 allowed in previous years. And for kids under 6, the exemption has moved to $3,600.
That exemption is now available in monthly payments, as well, rather than a lump sum to be calculated along with your taxes.
For Whirley, that could mean a bigger tax bill at the end of the year, she said.
“So, at the end of the year, say I owed $10,000, that $4,000 total child tax credit would be applied, and I would only owe $6,000,” she said.
If she accepts the monthly payments of $250 per child per month, Whirley said, she’ll have collected $3,000 by the end of the year. With $6,000 in total exemptions now available to her from her two children, she’ll have $3,000 remaining to declare.
Without the American Rescue Plan’s Child Tax Credit, Whirley would have had $4,000 to declare. Knowing that the total exemption is now higher, Whirley said, she might find even more benefit in waiting, declaring the full $6,000 and receiving a lower tax bill at the end of the year.
She talked to her accountant, who agreed it might be a good idea in her situation.
“In a way, it can save you from paying (a large bill),” she said.
Whirley said for others, though, she thinks it could be a great program.
“If you’re struggling right now, or if you usually don’t owe money and you get money back, then it’s great for those families,” Whirley said.
Colorado families were mentioned on the floor of the U.S. Senate as Sen. Michael Bennet has been a vocal supporter of the idea to expand and retool the Child Tax Credit.
Bennet’s work on the American Rescue Plan resulted in the addition of the Child Tax Credit expansion, and in a floor speech July 14, Bennet said he hopes families will be able to use the monthly payments to offset the effects of a “triangle that so many Americans are caught in” where the labor provided by families into their local workforce provides needed health insurance, but not enough income to cover the cost of early-childhood education.
Bennet said a mom in Rifle told him “I work so I can have health insurance, and every single dollar I make goes to paying for this early-childhood center, so I can work.”
Bennet said Americans are stuck in situations like those because “we have had an economy that for 50 years, has worked really well for the top 10% and not for anybody else in America.”
Under the Tax Cuts and Jobs Act of 2017, the phase-out of the Child Tax Credit — the threshold of income at which the credits start to diminish — was increased from $110,000 to $400,000 per year for a married couple filing jointly. Once a couple makes more than the phase-out amount, the credit total would start to diminish, based on the number of children being declared, and the ages of those kids.
The Child Tax Credit phase-out amount has returned to a lower income level under the American Rescue Plan — $150,000 for married couple filing jointly.
In the upper-middle-class enclaves of the Eagle Valley, there may be more cases of those who want to opt out.
Did Mom re-enter the workforce in 2021 and find a high-paying job amid the desperately-in-need labor market? Was Dad out of work during the pandemic but now finding more gigs than he can handle?
Families who have seen a very large and sudden uptick in their income in 2021 — like a one-income family that recently became a two (or three) income family — may want to opt out of the credit, as they could be required to pay back the payments if they went to — for example — a one-child married couple filing jointly making $100,000 to a one-child married couple filing jointly making $250,000 per year.
But for middle- to low-income families — married couples filing jointly who make $60,000 or less, or single individuals making $40,000 or less — this will not be the case under a safe harbor provision within the new statues.
To those families, even if that $60,000 is a large uptick in income, no money will be due at tax time as a result of the monthly payments, even if the IRS was making those payments in error based on information about the child provided in tax returns from previous years.
Couples making more than $60,000 would be responsible for an incremental amount of the overpayment, phased in gradually, until they reach $120,000, at which point they would owe the full amount of the overpayment.
Overpayments based on the age of children is unlikely under the American Rescue Plan, however, because families can now declare 17-year-old children under the credit. Formerly, families could no longer declare a child once that child reached the age of 17.
For more information, or to opt out of the monthly payments, visit the IRS’s Child Tax Credit update portal at IRS.gov/credits-deductions/child-tax-credit-update-portal.