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Approximately 39 million American families will receive the first of six monthly prepayments of the extended federal child tax credit on July 15.
However, some of these families should choose not to receive the monthly payments, financial experts say, and instead wait to collect all of the loan when they file their taxes for 2021 next year.
In June, the IRS launched an online portal for families to use to notify the government agency that they do not want to receive the advance payments.
“It’s important to allow this ability to opt out of these payments because we don’t know how people budgeted their tax refunds,” said Elaine Maag, research fellow at Urban-Brookings Tax Policy Center. “And if it is important to them that they receive this loan as a one-off payment, we want to make sure that people have this opportunity.”
In fact, if a family has not yet opted out of the monthly prepayments, they will receive a direct deposit or paper check this month, since the last day for the July payout preference update was June 28, the IRS may still say to stop sending the payments, which means that he will not receive the money for the remaining five months until the end of the year.
A credit for money owed
Families who tend to owe money to the IRS when filing their taxes may want to use the full credit over the next year instead of receiving half of it upfront, as the benefit makes up for what they ultimately have to pay.
“It is a protection against owing a surprising amount of money to the IRS,” said Maag.
The expanded child tax credit is part of the US rescue plan that was put into effect by President Joe Biden in March. For 2021, the loan will increase from $ 2,000 per child under the age of 17 to $ 3,000, with an additional benefit of $ 600 for children under 6.
This can either be in monthly payments – $ 250 per month for children 6-17 years of age and $ 300 per month for children under 6 years of age – or as a lump sum for 2021 taxes.
Full credit is available to all children under the age of 17 in families with Adjusted Gross Income less than $ 75,000 for a single parent and $ 150,000 for a married couple in 2020 or 2019, and ends for individuals earning $ 95,000 and married couples, who collectively file $ 170,000 although they are still eligible for the regular child tax credit.
A flat rate for expenses
Other families may want to decline the advance loan because they would prefer to spend a large lump sum at once rather than smaller amounts of money each month.
For many Americans, their tax refund is the greatest godsend they see all year round and something they can rely on in their budget. These families may be planning a large tax refund that they can use on a purchase, e.g. B. a car, refrigerator, or other household item.
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“We don’t want to take this ability away from people,” said Maag.
Since the credit is higher than in previous years, it is of course not a matter of course that those who make use of the monthly advance payments will automatically receive a lower tax refund than they are used to. However, some families may prefer to receive the extra money all at once rather than having it distributed.
For some families, likely those on the higher end of the income range, who are eligible for the credit, receiving the monthly prepayments can destroy existing tax planning.
This is generally true of families who not only have income from wages, but also have capital gains or other funds, and therefore the IRS withhold more than the standard amounts often paid biweekly by an employer.
“If you suddenly get $ 2,000 or $ 1,000 in the course of the year, there may be inconsistencies in filing your tax return,” said Maag.
Therefore, they may also prefer to use the entire credit when offsetting a tax liability. If they do not have additional tax liability, they will get the money back.
To see how much to expect, the personal finance website Grow created a calculator that weighs your enrollment status, annual income, and the number of dependents you have.