By Matthew Gaude & Shawn McGuire
As much as we love our children, any parent will tell you that raising children is an expensive endeavor. In fact, according to the U.S. Department of Agriculture, a child born to married, middle-class parents in 2015 will cost $233,610 to raise to adulthood, excluding college costs. (1)
Thankfully, the American Rescue Plan has increased child tax credits from $2,000 to $3,000 per child, or $3,600 per child under 7, which should help with some of the expenses attached to rearing children in most American families. Another change to the child tax credit is that the IRS will make half the credit amount available through advanced payments to qualifying families every month, starting on July 15 through the end of the year. Taxpayers will receive the other half when they file their 2021 return next year. The first monthly child tax credit payment was distributed to 35 million eligible families this month. (2)
Of course, the amount you receive depends on your adjusted gross income and the number of children you have. If your family qualifies for the full tax credit, you will receive either $250 or $300 per child depending on the child’s age on every 15th day of the month from July and until the end of the year. If you are fortunate enough to have a higher income but still qualify for the tax credit, your family will receive $167 per month for each child. (3) As it stands right now, the payments will not carry over into 2022 (although President Biden wants to extend them beyond this year), so plan accordingly.
How Do I Know if I Qualify?
Not all families with children will get the higher child tax credit, but most will. The enhanced tax break begins to phase out at modified AGIs of $75,000 on single returns, $112,500 on head-of-household returns and $150,000 on joint returns. The amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold amount. Note that this phaseout is limited to the $1,000 or $1,600 temporary increased credit for 2021 and not to the $2,000 credit.
For example, if a married couple has one child who is four years old, files a joint return, and has a modified AGI of $160,000 for 2021, they won’t get the full $3,600 enhanced credit. Instead, since their modified AGI is $10,000 above the phase-out threshold for joint filers ($150,000), their credit is reduced by $500 ($50 x 10) – resulting in a final 2021 credit of $3,100.
How Does it Work?
If you filed your 2020 tax returns, the IRS will glean qualifying information for the child tax credit on that return. If you have not filed for 2020, the IRS will base the tax credit amount and qualification on your 2019 taxes. If you received your tax return via your bank account, then you will receive the child tax credit payments in the same bank account. If you received your return by mail, the payments will come in the form of a check or a debit card.
Do You Need to Do Anything?
If your family is eligible, then most likely you don’t need to jump through any special hoops to get the monthly payment, and, as the first payment was scheduled for July 15, you may have already received it. However, if any circumstance has changed with your family, you may have to contact the IRS to alert them of any significant change that could affect your eligibility or payment amount.
The good news is that you don’t have to call the IRS or submit a complicated form to notify the agency of any significant changes. As part of the American Rescue Plan, the IRS developed a child tax credit update portal that allows you to check to see if you are enrolled to receive the advance payments and allows you to provide or update banking information so that you can receive the funds.
If you and your spouse prefer to receive the child credit next year, the portal also allows you to unenroll so that you do not receive your advance payments. If your family did not file a return in 2019 or 2020, you will need to submit the required information to the IRS, which can be done through the IRS’s child tax credit non-filer sign-up tool. It also might be smart to opt-out if you no longer qualify for the child tax credit. This could happen if your 2021 income is too high, someone else (e.g., an ex-spouse) will claim your child as a dependent in 2021, or you live outside the U.S. for more than half of 2021. Otherwise, you might have to pay back some or all the money you received as monthly payments this year.
Challenges With the New System
If you qualify for a tax credit payment but did not receive payment yet, it could be because the IRS does not have the most updated information on file, especially if you just recently had a baby. Keep in mind that the IRS’s online tools are incredibly useful in verifying if your family qualifies for the credit. With the online portal, you can also view your payment history and update any outdated information, including your home address and bank information.
Do You Have Questions?
The child tax credit is just one of many things that we help our clients stay aware of and encourage them to use as they develop a wealth management strategy that works for them and their financial needs. If you have questions about how we can help you fine-tune your wealth management strategy, call our office at 770-552-5968 or email firstname.lastname@example.org. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional. Neither APFS nor its Representatives provide tax, legal or accounting advice.