If you’re one of many tens of millions of American taxpayers receiving advance Baby Tax Credit score funds from the IRS this yr, chances are you’ll be questioning how this might have an effect on your 2021 tax return.
We all know adjustments to your taxes could be complicated and troublesome to navigate at one of the best of instances, and the coronavirus pandemic has solely added extra uncertainty. However there’s no have to stress — we’ve damaged all of it down for you.
Will I nonetheless be getting a Baby Tax Credit score fee after I file my taxes?
Sure. Below the American Rescue Plan enacted by President Biden in March, eligible households are receiving half of their Baby Tax Credit score (CTC) paid out in six month-to-month installments from July by way of December. These households will then declare the remainder of their CTC once they file their taxes subsequent yr, versus claiming it multi functional lump sum.
When you’d like a assessment of who qualifies for these month-to-month funds and the way they work, try our in-depth rationalization of the Baby Tax Credit score growth.
However how may claiming these advance funds probably have an effect on your 2021 revenue tax return? Listed below are some vital issues to bear in mind as you suppose forward to submitting your taxes this spring.
What Baby Tax Credit score quantity will I obtain with my tax return?
It relies upon. One other change to this yr’s CTC was a rise within the credit score quantity from the standard $2,000 per baby to $3,000 per baby (and as much as $3,600 for youngsters ages 5 years outdated or youthful). Nevertheless, not all dad and mom will qualify for your entire further credit score worth if their revenue is above the IRS’s gradual “phaseout” thresholds.
Let’s take a look at a few examples of how the identical household would calculate their credit score quantity in two totally different revenue conditions.
State of affairs 1:
Debra is a single mum or dad with three children ages 4, 9 and 13. She has an adjusted gross revenue (AGI) of $70,000 (lower than the $112.5k phaseout threshold), which means her youngsters qualify for the total credit score worth obtainable. Debra has been receiving advance month-to-month funds and is attempting to calculate the credit score quantity she may obtain when she information subsequent yr. Beforehand in 2020, she obtained a credit score of $6,000 and she or he needs to know the way totally different her credit score can be this yr.
Able to do the mathematics? Right here’s a method Debra may calculate her estimated credit score quantity:
- Decide the total potential credit score worth for every of her dependents.
$3,600 for 4-year-old + $3,000 for 9-year-old + $3,000 for 13-year-old = $9,600 (whole CTC worth)
- Calculate how a lot of her whole CTC worth she will anticipate to obtain together with her tax return.
Since Debra has already obtained half of her whole CTC worth as month-to-month funds, she must divide her whole ($9,600) by 2 to calculate how a lot could also be left over to say when she information.
On this case, Debra can fairly anticipate to obtain a $4,800 credit score when she information her 2021 tax return. Though this quantity is decrease than the $6,000 credit score she obtained in 2020, the month-to-month funds she claimed from the IRS imply her whole credit score it nonetheless increased than final yr, though she is claiming a decrease quantity when she information.
State of affairs 2:
Now let’s use the identical household, however this time Debra’s AGI can be $120,000, which is above the IRS’s phaseout threshold of $112.5k for head-of-household filers. This time we’ll calculate her projected CTC tax refund worth by trying on the month-to-month funds she obtained.
- Decide her month-to-month CTC fee.
Debra has been amassing from the IRS every month based mostly on her revenue.
- Calculate the estimated CTC credit score she will anticipate to obtain together with her tax return.
Debra has obtained six month-to-month funds totaling half of her estimated CTC worth. To simply estimate the remaining CTC worth she will anticipate to obtain together with her tax return, she merely must multiply her month-to-month fee by 6.
$500 x 6 = $3,000 (estimated remaining CTC worth Debra will obtain when she information)
Will I’ve to pay again any portion of my Baby Tax Credit score?
Not like stimulus checks, some tax filers could also be responsible for paying back a few of their month-to-month CTC funds in the event that they had been overpaid by the IRS.
It’s vital to notice that the IRS determines how a lot your month-to-month credit score needs to be based mostly on the way you filed final yr’s taxes (or your 2019 return should you didn’t file in 2020). When you skilled any of the next adjustments or circumstances from 2020 to 2021, it could impression your tax refund:
State of affairs 1: Your revenue elevated dramatically in 2021.
Let’s say Michael has a partner and two children. He suffered a job loss final yr and was out of labor for almost all of 2020, however Michael landed a brand new job this February and has been working full-time ever since.
When Michael and his partner filed taxes final yr, their reported revenue was a lot decrease than their projected revenue for the 2021 tax yr. However as a result of the IRS is basing its month-to-month Baby Tax Credit score funds on their 2020 revenue, Michael is receiving an overpayment from the IRS when adjusted for his present revenue.
If you’re in an identical scenario and anticipate your adjusted gross revenue to be drastically increased than it was final yr, chances are you’ll be receiving greater CTC funds than you qualify for based mostly in your new revenue. On this case, you may find yourself paying a portion of that credit score again subsequent yr while you file.
State of affairs 2: You’re divorced and take turns claiming the Baby Tax Credit score.
Right here’s one other widespread state of affairs to think about: Diane and Robert are divorced and share joint custody of their baby. They agreed to alternate which mum or dad claims the Baby Tax Credit score every year — Diane claims the CTC on even years and Robert claims the credit score on odd years. This implies Diane final claimed their qualifying baby on her 2020 tax return. The IRS doesn’t find out about their alternating settlement, so Diane has been receiving the advance CTC funds for 2021.
When Robert goes to file his federal taxes and claims the credit score on his tax return, he can be entitled to the total Baby Tax Credit score he qualifies for based mostly on his revenue, and he’ll obtain his fee in a single lump sum. In the meantime, Diane could also be chargeable for repaying the funds she obtained from the IRS.
What occurs if I used to be overpaid by the IRS, however I can’t afford to repay my stability due?
The IRS has offered low-income households with a safe harbor in relation to repaying any extra CTC funds obtained in 2021. In case your AGI is at or beneath the next thresholds, you’ll not be chargeable for compensation:
- $60,000 or much less for married {couples} submitting a joint return or qualifying widows or widowers
- $50,000 or much less for heads of household
- $40,000 for single filers or those that are married and submitting a separate return
As soon as your AGI exceeds the above limits, the compensation safety quantities are phased out very similar to the elevated worth of this yr’s Baby Tax Credit score.
In case your revenue is simply too excessive to qualify for secure harbor compensation safety and you might be nonetheless unable to pay your full tax stability, you aren’t out of choices. The IRS affords a wide range of different repayment options for American households who can not afford to pay their full stability out of pocket.
Most American taxpayers gained’t be blindsided by any large adjustments to their tax refunds subsequent yr, however as we’ve realized, there are some particular circumstances to bear in mind. It’s all the time a good suggestion to crunch the numbers forward of time so you’ve gotten a way of what to anticipate and time to organize accordingly.