Skip to main content

Check out our 3Q2024 Market Review and Investment Outlook for the remainder of 2024

Tax Planning
Baby 2717347 1920 KTS

Parent PSA: New Child Tax Credit Payments Could Negatively Impact Your 2021 Tax Bill

My wife and I have two children and on July 15th we just received our first monthly child tax credit payment as part of the Fed's new American Rescue Plan. Receiving money from the fed...sounds like a win-win, right? Not so fast. Here's why we will be opting out of this tax credit as soon as possible, and choosing to receive full payment when we file our 2021 tax return next spring.

As mentioned, the new monthly child tax credit program was created in March 2020 with the American Rescue Plan federal legislation. These payments are based on certain qualifications (i.e. income and number of eligible children). Families can expect to receive up to $300 per month per child under the age of 6 and up to $250 per month for children ages 6 to 17 years old.

Of course, everyone's financial situation is different. However, if you are someone who usually owes money at tax filing time, or are right at that break-even point, you need to know that your tax return for 2021 will look significantly different if you continue to receive these monthly child tax credit payments. In our case, we try to keep our tax bill right at a break-even each year. But, with the monthly child tax credit payments coming for the rest of 2021, we know we will have a significant bill due at tax filing next year if we do not turn off these payments. Here's why...

SCENARIO EXPLAINED

My wife and I are receiving two payments for our two children of $300, which equals $600/mo in advance payments. This monthly payment will last from July – December for a total of six months. After six payments, we will have received $3,600 in advanced child tax credits. If you are at a break-even point on your federal tax return, where you typically owe no money at tax filing time, then due to these monthly payments, you will likely have a tax bill due at tax filing time of $3,600. If you are not proactive in saving for this bill, this is a substantial amount of money to try to come up with all at once.

If this sounds even remotely like your situation, you too should consider opting out of the payments right now. Remember, you will still receive the child tax credit — it will just come at tax filing time next year. Below is a link to opt-out or unenroll should that make sense for your situation.

Please note that if your most recently filed tax return was a joint tax return, your spouse will also need to unenroll, if appropriate. Unenrolling is an individual action. If your spouse does not unenroll, he/she will receive payments for their portion of the advance Child Tax Credit.

On the other hand, if you normally receive a significant tax return every year, you may not encounter any negative tax ramifications from receiving the monthly tax credits now versus later. But I would still recommend becoming more familiar with this change and how it affects you directly. Consult with your McKinley Carter financial advisor or a tax expert for more information.

Sources:

Related Insights
I Stock 888240578 NMD blog
Tax Planning

Roth Conversion Strategy: Is It for Me?

When considering if a Roth Conversion is right for you, it's important to evaluate your current financial situation, future income expectations, and long-term retirement goals. We encourage you to seek the guidance of a financial professional to review the complexities of this strategy. That said, here's an informative introduction to the Roth Conversion strategy — how it works, why one would consider taking advantage of it, and when it could make the most sense to be considered.

Read More
I Stock 1480873843 JAE Blog 0524 copy 800px
Tax Planning

Trust: When a Will is Not Sufficient

For a majority of Americans, a Will is likely sufficient to accomplish their simple wealth transfer needs and desires. For others with more complex wealth transfer stipulations, a Will may fall short and the use of a Trust may be necessary. Learn more about the important estate planning conversation: Will vs. Trust.

Read More
I Stock 1731084042 JAE Blog Website
Tax Planning

Have Company Stock in Your 401(k)?

As you work through the labyrinth of decisions that move you from working and planning and working some more, to drawing an income and conserving value, it is always a welcome discovery to reduce your tax bill and, therefore, add another layer of security to your personal financial outlook.

One of the lesser-known strategies some retirees should consider applies if they have company stock within their 401(k) or Profit Sharing Plan; the special tax election is known by the label Net Unrealized Appreciation (NUA). Learn more.

Read More
Play