4 Things You Need To Know About the 2021 Child Tax Credit


One change made in the pandemic relief efforts was to increase the child tax credit. Normally this is something that is applied when you file your tax return if you have dependent children.

However, part of the change made for 2021 is that 50% of the tax credit will be paid out in monthly payments, start on July 15th. Taxpayers with children are automatically enrolled and must elect to opt out of the monthly payments (and just receive the credit when you file taxes).

While money being dropped into your bank account sounds great, there are a few of things to be aware of as the program unrolls:

1. It might affect your tax refund next year.

If you're used to getting a small refund, you might be in for a surprise next year when it's smaller, or you could potentially owe. That's because these monthly payments are an advance on your tax credit.

For example, let's say you have a 10 year old dependent. In previous years you would receive a $2,000 tax credit when you filed your tax return. Now the amount has been raised to $3,000, but $1,500 of it is being paid to you in advance. That means when you file your taxes, only $1,500 of the tax credit will be applied, which affects your normal tax refund amount by $500.

2. Don't get used to the money.

I think one of the biggest looming dangers is that this is going to feel like a pay raise. For 6 months you'll have an extra few hundred dollars being deposited into your account.

The danger here is that after December, the payments will stop. If we expand our lifestyle, or get used to this money, it's going to suddenly feel like you took a pay cut. I recommend funneling this money into savings or toward your debt if you don't need it to make ends meet.

3. When in doubt, opt-out.

If you're worried about how it will affect you, and you don't need the cash, then it's okay to simply opt-out. Like I said, this money is an advance. You'll still get the credit when you file your taxes in 2022.

4. Speak to a CPA.

Taxes are not my area of expertise. Every situation is unique, so please speak to a CPA or licensed accountant to see what your best course of action is.

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