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$3,000/$3,600 Child Tax Credit: which families might need to opt out?

Direct payments will begin showing up in the bank accounts of millions of American families on 15 July, but some may want to opt out and wait for the money next year.

Direct payments will begin showing up in the bank accounts of millions American families 15 July, some may want to opt out and wait for the money next year.

The IRS will begin sending monthly payments as part of the enhanced Child Tax Credit to around 36 million American families on 15 July. Depending on the age of the children and eligibility of the parents, those payments could be up to $300 per month through December.

The system will work similar to how the Economic Impact Payments, better known as stimulus checks, with the amount that families receive based on the most recent information the IRS has on file through a tax return or the Non-Filer tool which has been relaunched.

However, unlike the stimulus checks any overpayments on the credit would come out of next year’s tax refund or even have to be repaid out of pocket. Some families with this in mind may want to consider holding off receiving the credit until they file their 2021 tax return next year.

Also see:

Who is eligible to receive the enhanced Child Tax Credit?

Under the new legislation, individuals will qualify for the full enhanced Child Tax Credit if their annual earnings are below $75,000; or a joint income of up to $150,000 for married couples, widows and widowers and $112,500 for heads of household. If your earnings are above those limits, you will receive a reduced credit which gradually phases out $50 for every $1,000 over the threshold.

An eligible a taxpayer must have their main home in the US for more than half the year to qualify for the credit. The IRS urges taxpayers with children to file a 2020 tax return as soon as possible, if they haven’t already, to get the correct amount from the tax credit. Those with little or no income who are eligible to receive the credit but not normally required to file taxes can use the agency’s Non-Filer online tool.

The IRS set up the Non-Filer tool to allow people who aren’t required to file a tax return to provide the basic information for them to receive their $1,200 stimulus check. It has been reactivated for the same purpose as well as being repurposed to provide the basic data necessary to calculate and issue their advance payments on the 2021 Child Tax Credit such as name, address, and Social Security numbers. The portal is only available to those who neither used the Non-Filer tool yet, nor sent a 2020, or 2019, tax return to the IRS and aren’t required to do so.

The agency also recommends using direct deposit to receive their refund and the advance payments faster. Otherwise, for the initial payments the IRS will send a paper check. The US Treasury is working on sending prepaid debit cards to those who are unbanked or underbanked in the future.

Why you might have to return the advance payments

The IRS will use 2020 tax returns, and in some cases those from 2019, and information the tax authority collected last year on its Non-Filer online tool. This could result in either over or underpayment of the amount a family is eligible to receive.

An overpayment could happen if your income increases in 2021 compared with your reported income in 2020 which qualified you for the advance payments. An underpayment could occur if you have a new addition to your family such as a baby or new qualifying dependent this year that the IRS doesn’t know about. In the former you might need to repay the money next year, in the latter you could miss out on much needed money.

The IRS will be launching two new online portals before July in addition to the reboot of the Non-Filer tool. One portal will allow taxpayers to check their eligibility for the payments. The second portal will allow families to opt out of the advance payments and update their family and financial information as circumstances change.

Who will have to repay overpayments

With advance payments on last year’s information, or even from 2019, there are sure to be some overpayments. Although the American Rescue Plan creates a “safe harbor” for lower- and moderate-income taxpayers, above a threshold taxpayers would need to repay any overpayments they received.

Households with adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return and $60,000 on a joint return won't have to repay any overpayments on the Child Tax Credit that they receive. However, those households making at or above $80,000, $100,000 and $120,000, respectively, will need to repay the entire amount of overpayment. For households with earnings in between these thresholds, they will need to repay a portion of any overpayments received.

"If you are getting money and don't qualify, you need to opt out of it. You will have to pay that money back," Mark Steber, Jackson Hewitt's chief tax information officer told CBS.


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