School sales should get a boost after millions of families paid their first monthly child tax credit advance in July. Another monthly payment is also just around the corner on August 13th.
But before you add an extra pair of sneakers or a high-end backpack to the shopping cart, pay attention to the fine print.
For example, did you know that if they get more than they are actually due every month from July to December, some people have to pay back the money next year? Others might consider a much smaller tax refund than they would normally expect.
We have heard from many angry taxpayers as soon as the 2022 tax filing season begins, when those expecting extra high tax refunds end up with a much smaller payout – or even owe money.
The tax regime for the child credit is different from the last three stimulus payouts, where some individuals may have received extra money and not had to pay it back if they no longer qualify due to income or other factors.
“The IRS has made it clear that it is an upfront payment and if you are no longer eligible it will be repaid on your 2021 tax return,” said James O’Rilley, CPA and Tax Director of Doeren Mayhew in Troy.
The monthly cash outlay is an “advance payment” of what the Internal Revenue Service estimates based on your 2019 or 2020 income tax return, depending on which return has been processed by the IRS so far.
However, how much you can claim for the child tax credit will ultimately be calculated based on your income and your situation for 2021 when you file a return next year. Some Repayment protection are there for some who have limited income.
Now it’s important that people keep accurate records of what they received and when, said O’Rilley.
In January 2022, the IRS will send what is called a letter 6419 to indicate the total amount of advance child tax credit payments that have been paid to you that year.
Similar to the incentive payments that applied to returns in 2020, you need to match what you have already received against what you are entitled to.
Failure to reconcile prepayments, O’Rilley warned, could delay processing your tax return after it was filed in the next year, delay refunds, or convert a refund to a balance due.
While the message is out there, we all know that a lot of people just don’t focus on next year’s taxes in July and August. But some will regret it if they don’t.
As of July, millions of eligible families received up to $ 300 per month for each eligible child ages 5 and under and $ 250 per month for children ages 6-17. The monthly payouts run from July to December.
If your child no longer reaches credit in 2021, the IRS is likely to make some adjustments on their own. But tax experts say you may want to pursue that too. The IRS does not include a child who will turn 18 in 2021 towards your prepayment. And the IRS is expected to adjust the payment for a child turning 6 this year to $ 250 per month instead of $ 300.
Thanks to an expanded child tax credit, those who qualify and have an eligible child aged 5 and under could increase their credit from $ 2,000 to up to $ 3,600. About half of that money is slated to be paid out in 2021, the rest on tax returns in 2022. Income limits will keep some from receiving the credit.
You can stop the August payment if you meet the IRS August 2 deadline. If you miss this, you can opt out of payment in September as long as you meet the August 30th deadline.
You can opt out of future payments with the IRS, but the final deadline is November 29th. If you wait that long, you will only decline the December prepayment.
Who would like to unsubscribe?
Alison Flores, lead researcher at The Tax Institute at H&R Block, said there were essentially two reasons someone would turn down a chance at hundreds of dollars a month this year.
First, you rely on a huge tax refund every year and don’t want any upfront cash. You may be more concerned about getting the highest possible tax refund for the next year rather than getting extra cash now.
Second, your situation is no longer exactly the same as it was last year – and you may have to repay some of that prepayment or face a smaller refund in the next year.
“Depending on your situation, deregistering could help you avoid payments that may have to be paid back,” said Flores.
Families, of course, need to review their own finances and speak to their tax advisor to decide whether to continue receiving monthly child tax deduction payments or to decline future payments.
The IRS notes that families may also want to get out if their primary residence was outside of the United States for more than half of 2021 – and they would no longer qualify for the loan.
How can you unsubscribe?
Go to IRS.gov and click on Advance Child Tax Credit Details. Then take a look “Manage Payments” Tool.
They would use what the IRS calls theirs Child tax credit update portal refuse to receive monthly payments.
“The IRS was pretty clear. In addition to being active, the opt-out portal is being used,” said Mark Steber, Jackson Hewitt’s chief tax information officer.
This is not a one-step, easy-to-use process. And honestly, you don’t want it so easy for the crooks to find a way to get their hands on your child tax deduction.
At the same time, however, there is concern that some people may not be able to simply opt out or give up after they hit the first roadblock or two. Take the time to understand the process.
Lots of people may need to create one new account via ID.me if they cannot log in with an existing IRS username.
The third-party system ID.me is now also used by dozens of countries to verify identity when applying for unemployment benefits to combat fraud.
You need a Phone with an account in your own name – not another person’s name. A smartphone, according to Steber, will make it easier for the third-party provider ID.me to send an SMS directly to you and speed up the process.
You’ll also need things like an email address, your social security number, and photo identification (driver’s license, passport, passport, or government ID).
Flores advises that both spouses must de-register separately when using joint registration status as spouses. If only one spouse signs out, you will receive half the payment.
You can’t log in again right now, she said, but the IRS expects this functionality to be ready by the end of September 2021.
Tax experts also point out that some people can adjust their tax withholding on their paychecks if they find the opt-out tool too overwhelming. Or others warn that you may want to set aside some of the prepayments – and not spend all of the money now – to fix possible tax problems in April.
What could lead to major tax problems?
Do you share custody? For example, let’s say you have two dependent children in 2020, but your ex-spouse will claim the children on the 2021 federal income tax return under your divorce settlement.
If so, one parent could pocket the prepayments now but will have to return all that money to the IRS next year – unless that parent refuses. If you have two children, ages 10 and 12, you might consider $ 500 a month – or $ 3,000 for six months – as prepayments.
If you are not the parent claiming the children to be dependent for 2021, you are not entitled to the child tax credit or any of the prepayments and you want to repay that money.
The risk of having to repay this money is higher if there are storage problems, said Steber.
Will you make more money in 2021?
If you’ve made more money this year than you did last year, you may qualify for a much smaller loan. And it is possible that you will start receiving too much money at the start of the game.
Those who are gig workers or the self-employed often have a harder time estimating their tax bills – and many make estimated payments over the year. You may now want to reconsider taking the child tax prepayments. It can be even more important to discuss the situation here with a tax professional to avoid problems.
For example, to receive full credit as a single parent, you must qualify for tax return as a householder and your income can be US $ 112,500 or less.
If you are single and do not meet the requirements to be a Head of Household, your income must be $ 75,000 or less.
If you are married and file a joint statement, you are entitled to Full Benefit if your combined income is $ 150,000 or less.
For many families with higher incomes, smaller child tax credits will be available.
The base child tax credit of $ 2,000 per child remains in place and begins to expire at a modified gross adjusted income of $ 400,000 for spouse enrollment and $ 200,000 for other applicants.
The extended loan for 2021 adds the extra cash to the $ 2,000 for many families with more modest incomes.
Steber said it helps that the IRS only pays out up to half the possible loan, which essentially sets a cap on how much tax refunds could be reduced and how much money might have to be paid back by some.