As I wrote a few months ago, July 15th marks the start of something new. Automatic monthly government checks are coming to the bank accounts of millions of families with kids. But, without some deeper understanding of the new child tax credit, some may be in for an unpleasant surprise at tax time next year.
With Biden’s signing of the American Rescue Plan in early March, major changes were made to the tax credit families receive for having children. To put this into perspective, child tax credits are provided to about 90% of families with kids. It’s a truly far-reaching feature of our tax code.
Unless you really inspected your tax returns, the child tax credit used to operate silently in the background. The new child tax credit now has a much more visible role.
Prior to the American Rescue Plan, the child tax credit was $2,000 for each child under age 17 and $500 for full-time college students. Married filers with modified adjusted gross income below $400,000 received these tax discounts. For single and head-of-household filers, the eligible income threshold is cut in half.
Under the American Rescue Plan, there are two major changes.
First, the law introduced a new intermediate income threshold of $150,000 for married filers with kids. This first income threshold now operates alongside the higher $400,000 threshold. For people who make less than this lower threshold, the tax credit was also boosted to $3,000 for kids between age 6 and 17 and $3,600 for kids under age 6. For those earning between the first and second income threshold, the smaller $2,000 per kid tax credit still applies.
Second, the law introduced the concept of monthly checks. Starting on July 15, parents are going to receive automatic, monthly deposits into their bank account or mailbox. For families below the first, lower income threshold, they will now get monthly deposits of $250 to $300 for each of their children. Smaller monthly deposits will also arrive for those making between the first and second income thresholds.
Now, here’s the catch.
Unless Congress steps in, these monthly deposits will stop in January. And, perhaps more importantly, these are actually “advance payments” of the child tax credits. This part deserves a little more explanation.
In the past, child tax credits were received only at tax time. For many, they help to create big tax refunds. Many households plan on their tax refund to help pay for upcoming vacations or pay off old Christmas bills. Without the windfall created by the “all-at-once” child tax credits, tax refunds might look considerably smaller at tax time next year. In other words, the already-spent monthly deposits might result in an unpleasant cash flow surprise for millions of families.
Once started, automatic monthly checks are a tough thing to take away. I expect Congress to act soon to continue them into 2022 and beyond. If they don’t, millions of families might have to develop a plan to save some of the monthly checks to blunt the impact of next year’s smaller-than-usual tax refund.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com