The households of roughly 60 million children obtained their first installment of the improved Little one Tax Credit score funds on July 15. We’re right here to bust a number of the widespread misconceptions surrounding the funds.
1. You possibly can hold these funds.
Many households have expressed concern over holding the cash fearing they’ll must pay it again once they file their return in 2022 – however that’s merely not the case for many.
This cash is an advance of the Little one Tax Credit score eligible households usually would declare on their 2021 tax return. In the event you haven’t skilled a major improve in your revenue from 2020 to 2021 (and we imply lots of of 1000’s), there isn’t any purpose to sweat having to pay the cash again. It’s yours to maintain and put to good use.
2. The funds should not taxable.
That’s proper – this cash isn’t taxable in your 2021 tax return. Just like the stimulus funds, the cash is an advance of a tax credit score that applies to your 2021 return. It isn’t thought of taxable revenue.
Once you file your 2021 return subsequent 12 months, you’ll reconcile the month-to-month funds you obtained from the IRS in 2021 with the Little one Tax Credit score on Kind 1040.
3. That is what influences your fee quantity.
Eligible households qualify for as much as $300 per 30 days for every youngster youthful than six and as much as $250 for every youngster aged six to 17. Over a 12 month interval, that equals to $3,600 and $3,000 respectively per youngster. The newly-advanceable Little one Tax Credit score funds are designed to pay qualifying households in-advance half of the Little one Tax Credit score they qualify to obtain based mostly on their 2021 tax scenario. That mentioned, not everybody will obtain the utmost quantity for every youngster. Listed here are just a few elements that would influence the scale of your fee:
- Age requirement: As soon as a baby reaches the age of 18, they’re not thought of an eligible dependent for the credit score. Subsequently, you shouldn’t anticipate to obtain a fee to your youngster if they’re age 18 or older by the tip of 2021 no matter whether or not you continue to declare them as a dependent in your return.
- Revenue limitations: Your revenue additionally impacts your month-to-month fee. Cost quantities are decided based mostly in your 2020 tax return (or 2019 in case your 2020 return hasn’t been filed or processed by the IRS but). The American Rescue Plan made the Little one Tax Credit score totally refundable for 2021 versus solely partially refundable (as much as $1,400) in earlier years. However the newly refundable expanded portion of the credit score – which is valued at $1,000 for youngsters age six and older and $1,600 for youngsters age 5 and youthful – is phased out based mostly on revenue.
That additional credit score quantity begins to part out for single filers who earn $75,000, head of household filers who earn $112,500 and joint filers who earn $150,000. The elevated fee decreases by $50 for each $1,000 of revenue earned above these limits for every submitting standing.
Let’s have a look at two fast examples that embody the identical household however with two completely different adjusted gross incomes (AGI).
Instance CTC Calculations
State of affairs 1:
A single submitting household with three youngsters ages 5, seven and 16 and an AGI of $60,000 qualifies them to assert the Little one Tax Credit score estimated at $9,600 based mostly on their dependent scenario. That additionally estimates their month-to-month fee to be $800 all through the rest of 2021.
Right here’s how you can do the maths:
Step 1: Calculate the full worth potential of the Little one Tax Credit score.
$3,600 for youngster age 5 + $3,000 for youngster age seven + $3,000 for youngster age 16 = $9,600 (whole CTC worth)
Step 2: Calculate the full worth potential of the month-to-month funds.
$300 for youngster age 5 + $250 for youngster age seven + $250 for youngster age 16 = $800 (month-to-month fee)
Because the household’s AGI is beneath the revenue threshold, they are going to obtain the complete credit score worth every month.
State of affairs 2:
The identical single submitting household with three youngsters ages 5, seven and 16 now has an AGI of $80,000 ($5,000 above the $75k revenue threshold). On this scenario, that qualifies them to assert the Little one Tax Credit score estimated at $9,350 based mostly on their dependent scenario. That additionally estimates their month-to-month fee to be $779.
Right here’s how you can do the maths on this situation:
Step 1: Calculate the full worth potential of the Little one Tax Credit score for this household.
$3,600 for youngster age 5 + $3,000 for youngster age seven + $3,000 for youngster age 16 = $9,600 (whole CTC worth)
Since this household’s $80,000 AGI is above the $75,000 revenue threshold for single filers, they aren’t eligible to obtain the complete credit score. Their credit score worth will begin to part out on the $75,000 mark, making their month-to-month fee barely smaller.
Step 2: Calculate the credit score discount based mostly on the revenue threshold.
$80,000 (AGI) – $75,000 (revenue threshold) = $5,000
$5,000 is the quantity of revenue this household has above the revenue threshold the place the credit score begins to part out. The phaseout calculation is $50 much less for each $1,000 above the revenue threshold.
$50 x 5 = $250
Since this household is $5,000 above the revenue threshold, their whole credit score worth of $9,600 reduces by $250.
Step 3: Calculate the brand new Little one Tax Credit score values together with the revenue threshold discount.
$9,600 (most credit score worth) – $250 = $9,350 (new estimated whole credit score over 12 months)
$9,350 / 12 months = $779 (new estimated month-to-month fee)
4. Your refund subsequent 12 months seemingly received’t be a lot completely different.
As a part of the American Rescue Plan, the Little one Tax Credit score underwent a number of changes, and a kind of included rising the utmost worth of the credit score. The credit score elevated from $2,000 to $3,000 per youngster between the ages of six and 17 and $3,600 for youngsters underneath the age of six. Moreover, extra of the credit score is now refundable – which means, if eligible, you’ll obtain extra credit score {dollars} in your tax refund if it’s not wanted to pay down any tax legal responsibility.
Due to that, eligible households shouldn’t anticipate to see too important of a dip – if any in any respect – of their anticipated refund regardless of receiving a part of the credit score upfront. Most often, the expanded worth of the credit score will offset any lower you might need in any other case seen.
5. You possibly can at all times decide out.
Whereas there are only a few cases the place we advocate opting out of receiving these funds from a tax perspective, you at all times have the choice to take action if you want. Merely go to the IRS’ Child Tax Credit Update Portal to decide out. (Notice: If you’re a joint filer, each you and your partner might want to decide out to cease the funds.) Link
You possibly can decide out of the funds at any level all through the rest of the of 12 months. To have an effect on your fee, be certain that to decide out by the next deadlines:
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