Posted on May 26, 2021 in

It’s Payday

Payday is coming early this year for an estimated 39 million households. The IRS recently announced they will begin issuing payments in advance for child tax credit (CTC) starting July 15th. In general, taxpayers receive the child tax credit when they file a tax return. The amount received is based on the number of qualifying children the taxpayer reports. If the credit is greater than the amount of taxes due, the balance is paid out as a refund.

Under the new rules, households will receive half of the tax credit as a direct payment starting in July 2021, and the overall amount of the child tax credit is being significantly increased. This is great news for many families struggling to meet the needs of monthly bills, savings, and budgeting goals.

Here’s What to Expect

The limits for direct payments per child are $1,800 for children age 5 and under, and $1,500 for children age 6 and up. Families only qualify for the increased child tax credit if they have an adjusted gross income under $150,000 for married couples and $75,000 for individuals. AGI above the threshold amount will gradually phase out the CTC credit received. The same eligibility rules for the regular child tax credit apply to the new, higher limits.

The IRS is working to have an online portal up and running by July 1st so individuals may review their personal information on file. If changes are needed steps will be provided to make any necessary updates. Individuals have several options including the ability to completely opt-out of receiving early payments and receive the full CTC amount come tax filing. Families will also need to review the projected payment amounts to avoid having to repay any overpayments.

What to Review

The increased CTC amounts are part of the stimulus provided in the American Rescue Plan Act but are currently set to expire at the end of the year. Establishing appropriate spending habits now will help prevent future overspending when the monthly stimulus payments end. Another benefit to consider is the time value of money, which in the eyes of financial planners is everything. Having the option to receive money today rather than a future date is a no-brainer. These early payments may provide individuals with the ability to catch up or begin saving for their children’s future expenses. Whether it be educational costs, first vehicle, or future wedding costs review where it makes the most sense to save these dollars.

How to Plan

As always, tax laws and IRS rules are complicated. If claiming child tax credits has any effect on your financial life, schedule an appointment to speak with your CPA or tax advisor. It never hurts to have a second set of eyes to review and discuss how to fully benefit from the advance payments. With the help of a professional they will help make sure nothing is overlooked from reviewing for correct payment amounts, how the early payments may affect your taxes, and how you might be able to save and invest on the stimulus provided.

In the short-term we all love payday but with each paycheck received we must have a plan that aligns with our long-term goals. Figure out the priorities to ensure all the little steps along the way are preparing your future to achieve financial independence and protecting against worst-case scenarios.

KC Wilson
Portfolio Analyst