Sumter CPAs weigh in on advance child tax credits; some factors could force people to have to repay the money
Are the advance child tax credits that started flowing into most parents' bank accounts across the U.S. on Thursday another round of stimulus or not so much?
The actual answer is no, not exactly. They are an advance on government payments, and eligible parents need to look at the long-term tax picture, according to two local certified public accountants who spoke this week to The Sumter Item.
Shelly Lundberg, a long-time CPA with her own local firm, said she is always cautious when the government offers advance payments to taxpayers because people often "do not think about what happens on the back end."
FIRST, THE BASICS
The payments are a temporary expansion of the up to $2,000-per-child tax credit that parents usually receive when they file their taxes each spring. About 90% of American families are eligible, based on their income levels, according to the Internal Revenue Service.
Essentially, for tax year 2021, eligible families will receive more money per child, and they do not have to wait until they file their tax return to receive the funds. Instead, they will receive half in monthly installments throughout the second half of the year (July through December).
The full amount of the credit - available for married couples filing jointly with incomes up to $150,000, single filers with income under $75,000 and "head of household" filers up to $112,500 - is $3,600 for every qualifying child 5 and younger and $3,000 for every qualifying child ages 6-17.
Even families who do not earn enough money to pay taxes are eligible for the payments, and getting part of the credit as monthly payments is considered a boon for low-income families.
Starting Thursday, eligible families received and will receive $300 or $250 every month through December for each child in the respective age ranges. The remaining half can be claimed when filing 2021 tax returns early next year.
The payments will be made on the 15th of each month, except for August (when it is scheduled for the 13th because the 15th falls on a weekend.)
CPAs: MORE MONEY NOW MEANS LESS LATER
Getting more money now associated with the child tax credit means getting less money back in the spring next year with the credit, according to Lundberg and Leslie Bruner, another CPA with Sumter-based P.G. Palmer and Co.
While it is true that the overall tax credit will increase from the standard $2,000 per child to $3,000 or $3,600 in 2021, accepting the six monthly payments means the remaining 50% to receive at tax time next year decreases to $1,500 or $1,800 per child, Lundberg explained.
That works out as $200-$500 less per child in the spring.
Looking at it from this perspective accounts for the reconciliation feature that was not part of individuals' stimulus checks associated with coronavirus relief packages in 2020.
"The $200 difference is nominal," Lundberg said. "But you go on to the 6- to 17-year-old, you are down $500."
She added the biggest issue concerning accepting the monthly advance payments now or opting out and instead getting a lump sum with your 2021 tax return is a person's income and whether they normally owe the IRS at the end of the year because they choose not to have enough income withheld.
"In this case, while it is a little nominal if you are talking one child, but it still creates a higher burden," Lundberg said. "Where, at the end of the year, by not taking the money now, if you normally pay in, this could help the situation."
The IRS allows eligible parents to opt out of receiving the advance payments through its Child Tax Credit Update Portal at www.irs.gov/childtaxcredit2021. The deadline to opt out of the first payment received this week was June 28. However, families can still opt out of receiving future monthly payments.
Changes must be made by Aug. 2 to apply to the Aug. 13 payment and future payments, according to the IRS.
Both Lundberg and Bruner said every family's situation is different.
"You can't give the same advice to everybody because everybody has different circumstances," Lundberg said. "Now, if someone usually gets a large refund, for example, and then they ask about it, I will kind of explain the situation, saying, 'If you are comparing apples to apples on your income, you will get this much less.' And then they need to make that decision."
BUT WHAT IF SOMETHING HAS CHANGED IN 2021?
Advance child tax credit payments are based on 2020 tax returns, but Lundberg pointed out various factors that could change your 2021 tax return. These include a child turning 18, change in marital status or extra income this year from a new, higher-paying job or the sale of real estate - which was not a main residence - in the current boom.
That extra income could push someone beyond the income thresholds and then force a reconciliation at the end of the year. If someone is overpaid, they will be required to pay some of it back as it stands now, Lundberg said.
"Several factors can push you over the edge on income, such as real estate," she said. "Right now, I would just look at the tax credits as not a stimulus, and it will have to be paid back if you do not qualify for it."
SUMMARY ADVICE
Both accountants stressed the importance for people to review their 2020 tax return and how their finances have changed in 2021 as best as they can predict.
"If it turns out that it looks like this will adversely affect you, then opt out," she said. "Then, worst-case scenario, you will get all the money back with your 2021 return in the spring. It's better to be safe than sorry."
HOW CAN YOU APPLY?
If you filed taxes and the IRS already has your bank account information, the payments should be deposited directly into your account on the 15th of each month. If you did not file taxes in 2019 or 2020, you might still be eligible for the credit and can apply here: https://bit.ly/2Te6tNr.
CAN THE MONTHLY PAYMENTS BE STOPPED?
Yes. Some people are used to the child tax credit enabling them to get a refund on their taxes each spring. They might not want the monthly advance, and about 1 million people have opted out so far, according to administration officials. People can unenroll here: https://bit.ly/3hIO1Gd.
The deadline to unenroll through the portal for the Aug. 13 payment is Aug. 2, according to the IRS.
The Associated Press contributed to this report.