How do the Child Tax Credit Advance Payments Impact Your Taxes?

Am I Going To Owe More On My Taxes Due To the Advanced Child Tax Credit Advanced Payments?

Hey folks, Kevin Molen with Molen & Associates here. I wanted to give you a quick update on the advanced child tax credit payments. Now, if you don’t know what I mean when I say that, please check out our approximately six minute video that I did explaining what these advanced child tax credit payments are. This is crucially important if you have kiddos under the age of 19 that you understand how this is going to affect you tax wise. So this video is more of a warning in regards to what you should expect on this upcoming tax return. In July of 2021 the federal government began paying a portion of your child tax credit on a month-to-month basis deposited into your account. If you opted out of those payments, then you didn’t receive them, but if you did not opt out of those, which a lot of Americans did not, you started receiving them in July. It could have been between $250 to $300 per child depending on whether they are under the age of six or above six. Now, the advanced child tax credit payments are going to impact your 2021 tax filing here in in 2022 so let me explain. What happens is the federal government increased through legislation the child tax credit from two thousand dollars per child under the age of 17 to $3,000 per child under the age of 18, as well as $3,600 for children under the age of six. So, if you’ve got really young kiddos, you received three hundred dollars a month if you’ve got kiddos six or above, meaning between the age of six and the age of 18, you were receiving $250 a month. For example, I’ve got three kiddos that vary in ages. I personally went and opted out of receiving those payments.

Now why did I do that and how is this going to impact you personally? Well, it depends on how many kiddos you have, what your adjusted gross income is, and other factors on your tax return. Let me just give you the general breakdown here. The amounts that were sent to you starting in July represent what will be half of the eventual child tax credit so let’s break this down for a single filer who has one child, let’s say that child is the age of 10, just as an example. This single filer started receiving $250 a month starting in July and received that 250 every month until December. The legislation, which was proposed to continue these payments, did not pass so these payments have ceased for every American. For July to December of 2021 you were receiving this extra mailbox money every month. That $250 for this one single, hypothetical taxpayer. Then over that six month period ends up being half of the three thousand dollar child tax credit, right? So, $1,500 bucks that this taxpayer would have received in those that 15 month period. Now I’m going to get into the math here a little bit but follow me, because that three hundred dollars has now already been received by this taxpayer each month. So now when it comes time for this taxpayer to file their tax return, they’re gonna ask for the three thousand dollar credit, right? Because remember, it went from $2,000 to $3,000 – an increased credit. but $,1500 has already been paid, so now this taxpayer has to also acknowledge that they’re asking for the $3,000 credit but they’ve already received prepayments of fifteen hundred. So, now this single filer is saying, “I want the remaining fifteen hundred dollars as part of my refund of this child tax credit”. Because it went from two thousand to three thousand and they already received fifty percent representing fifteen hundred dollars so now they have fifteen hundred dollars left of that original credit but understand their previous tax filing, they actually received a $2,000 credit, so now instead of receiving $2,000 on their tax return, they’re going to get $1,500 from this credit on their tax return. Even though the credit increased, they’re going to see a reduction on their tax return because they already received these advanced payments.

So, if you followed my math here, you’ll understand that this hypothetical taxpayer is actually receiving more in government credits for their children, and while that is fine, they’re receiving less as a credit on their tax return. This is what’s actually going to catch a lot of people. Because what if this hypothetical taxpayer has two children or three children or four children. The the gap between what they received versus what they’re going to get on their tax return compared to the previous year widens for each child that you have. This means that if you expect to get a $500 refund every year, this hypothetical single taxpayer with one child the age of 10 would now expect to break even because they’re going to get $500 less in comparison to the previous year.

That’s not to be conflated with actually receiving less, because remember they got $1500 of that credit already. So you are still receiving more government credits, but my mother always taught me growing up that frustrations only come from unrealized expectations. So what I’m trying to do for you is to set the expectation for this next tax filing because the more children you have the more of a delta there will be between what your credit was on the last year’s filing and what your credit will be on this year’s filing. Not to say you’ve received less because you got those advanced payments and hopefully that was very helpful to you, but on your tax filing you should expect a lower refund because you had already received the higher credit through the year. That delta should approximately be $500 per child, but again that depends on the age of your children, your adjusted gross income and some other factors.

So hopefully this was helpful and it wasn’t too numbers oriented. As you can imagine I’m a bit of a numbers guy, but if you need more information about your specific situation give us a call. Our tax advisors are ready to help you.

My last point will be that you’re going to get a letter from the IRS. In fact, you probably already have it or it’s being sent to you now. This letter is going to inform you exactly how much you received in those advanced payments throughout the year in 2021. That is a crucial document to bring your tax advisor because they need to know the exact amount that you received because what we’re going to do is compare that with your child tax credit versus what you’d already received to determine the delta that you are due as part of your tax refund. If you don’t give this letter to your tax advisor, then you very likely are going to get jammed up with the IRS. You’re going to get a letter to indicate that the amount that you included was wrong and all of that kind of stuff we saw that happen with the stimulus payments from 2020. So, it’s really, really important that you make sure I know this number.

The IRS is also offering or providing online accounts for you to be able to log in. It’s kind of a lengthy process to log in if you haven’t done it before. It’s about 15 minutes, but if you already have a login, you should be able to log in and get that information. As you have questions about your specific situation, make sure and reach out to one of our competent tax advisors and we’ll be able to get it squared away from you. Thanks so much and have a great day!

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