Some households may have to repay the expanded child tax credit – 4 key differences from stimulus checks

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Starting next month, unrestricted federal government money will appear in bank accounts as Americans consolidate their finances during the pandemic.

Wrong.

This is the start of advance payments under the Expanded Child Tax Credit (CTC).

Eligible families will receive $ 250 for each child aged 6 to 17, between July and December. Families will receive $ 300 per child for each child under 6 years old. The first payments will be made on July 15, and the IRS will continue to issue payments in the middle of each month until the end of 2021.


“I wouldn’t be surprised if some people get confused, thinking this is a fourth round of stimulus checks.”


– Alvin Carlos, Financial Planner and Managing Partner of District Capital Management

The credit has paid lump sums to families at tax time for more than two decades. But earlier this year, Congress gave a one-time boost to the amount, broadened eligibility, and authorized advance monthly payments.

Federal lawmakers made these changes when passing the $ 1.9 trillion US bailout, a bill that also authorized economic impact payments of $ 1,400.

This year, the credit goes from $ 2,000 to $ 3,600 for children under 6 and from $ 3,000 for children 6 to 17 years old. Half of the sum can be advanced and distributed monthly.

Similarities between the two

There are also many similarities between CTC money and stimulus checks. In either case, there are no spending restrictions. In addition, households will receive the money if they fall below a certain income limit. The IRS determines stimulus checks and CTC payments using tax return data.

These income limits for full payment are the same for stimulus check money and expanded CTC payments. The thresholds are $ 75,000 per year for individuals, $ 150,000 per year for married couples applying jointly, and $ 112,500 per year for individuals such as single parents applying as head of the household. family.


The eligible minor does not necessarily have to be the person’s child, but must be declared as a dependent and have lived in your household for more than half of the year.

In either case, the IRS examines the recent tax return available within a two-year window. For the third round of stimulus checks and the CTC, the tax collection agency reviews 2020 returns, or 2019 returns if that year’s return is not yet available.

Neither stimulus checks nor CLC money will affect a person’s eligibility for benefits, according to IRS information.

The two cash payments are not counted as taxable income. If money counted as income, it could potentially create all kinds of tax headaches, like raising some people to higher tax brackets. (But keep reading for more information on a potential CTC tax puzzle you need to be prepared for.)

But there are also some important differences that people need to remember now and at tax time, they add.

“I wouldn’t be surprised if some people get confused, thinking this is a fourth round of stimulus checks,” said Alvin Carlos, financial planner and managing partner of District Capital Management, an advisory firm financial institution located in Washington DC.

The payments – whether in the form of direct deposits, paper checks or prepaid debit cards – will go to around 39 million households, which the Treasury Department says make up 88% of the country’s families with children.

So here’s a look at the critical similarities and differences between CTC money and the stimulus check.

Eligible minor

The IRS reduced stimulus checks for all eligible children in a household, but it also reduced checks to people without eligible dependents.

Without a minor living in the household, there will be no child tax credit. But the person doesn’t have to be your child, as long as they are a dependent.

The IRS has declared that the “eligible child” is the “son, daughter, stepson, eligible adoptive child, brother, sister, half-brother, half-sister, half- brother, half-sister or a descendant of one of them ”, including grandchildren, nieces or nephews.


Only 55% of potentially eligible parents say they’ve read or heard at least something about the expanded CTC, according to a poll in June.

The child must live in the household for more than half of the year and be properly declared as a dependent, the IRS said.

“It is possible that some people have not followed the child tax credit and do not know what the money is,” added Lauren Saunders, associate director at the National Consumer Law Center.

One area of ​​concern: Only 55% of potentially eligible parents say they’ve read or heard at least something about the expanded CTC, according to a survey of more than 1,700 people from early to mid-June by Data for Progress and commissioned by groups, including the Economic Security Project.

This percentage is too low, said Adam Ruben, director of campaigns for the Economic Security Project. Advocates of the widening tax credit must continue to work to spread the word so that “when this money gets into people’s bank accounts or they get a check in the mail, they know what it’s for.” “.

Real-time eligibility

The IRS determined the amounts of the stimulus checks based on a snapshot: a household’s income tax return. A lot can happen in a year, but if a family had a child after filing a tax return, the IRS had no immediate way to find out more about the new dependent and issue it. quickly another payment.

(A so-called “premium payment” in the third round of stimulus checks allowed the IRS to send additional money based on the 2020 tax return data after sending a stimulus check using data from the 2019 tax return.)


Unlike the rollout of stimulus control, adjustments to child tax credit advance payments will have a more real-time feel.

The adjustments to the advance payments of the Child Tax Credit will have a more real-time impression. On Tuesday, the IRS unveiled its “Child Tax Credit Update Portal”. This is where users can actually decline payments and also give the IRS up-to-date information on the number of eligible children in a home.

In the coming months, the IRS will expand the categories that can be updated. Later this month, users will be able to enter new bank account information for August payments. In August, users should be able to update their mailing address, the IRS said.

In future updates at some point in the summer and fall, people will be able to use the portal to update changes in family status and income, the IRS said.

You may need to pay it back

Talking about the portal and opting out brings up another big difference between stimulus checks and the CTC cash advance. Households paid too much CTC money in advance it may need to be refunded, Something this does not happen with the money from the stimulus checks.

IRS bases CTC payment amounts on data from 2019 and 2020 tax returns, but if a member of a household gets a better paying job or a nice raise, it could rule them out of eligibility to income, explained Carlos.

If the IRS pays too much, it will want to get the money back during the 2022 tax season. The IRS has said it will deduct the overpayment from refunds, but can set up installment plans for people who haven’t. the funds needed to pay the balance owed. (The IRS has said it will waive repayment obligations in some cases.)

This is one of the main reasons the IRS gives people the option to opt out of advance payments.

Carlos said he plans to speak with several clients who may consider opting out of the CTC advances because they are right around the income eligibility limits. A reversal could result in an unforeseen tax liability, he said.

Seizure of debts

Beware of garnishment with CTC money. When the first round of stimulus checks were launched under the CARES Act, stories emerged of some debt collectors slipping the money before families could use it.

Rules surrounding the second round of stimulus checks, for $ 600 apiece, prohibited garnishment of creditors with judgment, according to the National Center for Consumer Law.

But the organization said the third round of stimulus checks did not include garnishment protection due to a bill passed in a congressional maneuver called “budget reconciliation.”

CTC advance payments also do not have garnishment protection. “To the extent permitted by the laws of your state and local government, your child tax credit advance payments may be subject to garnishment by your state, local government, and private creditors.” the IRS said.

Saunders noted that a handful of states, like california, clarified that impending CTC payments cannot be garnished for debts. But a federal law against CTC garnishment is a better solution, she said. Regularity of payments will make it easier for debt collectors to plan their requests for money from banks, she said.

“We really need Congress to step in and protect these payments,” Saunders added.


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