What is the Enhanced Child Tax Credit?
Hello Money Talkers! So I am not a parent myself, however, a lot of my friends do have kids. So when I started hearing chatter from my friends with children about money the government was sending them I was obviously intrigued. Many of them seemed to think it was money from the government that had no strings attached, kind of like the stimulus. For many, it was a pleasant surprise to wake up and find “free money” in their bank account. So I decided to do a little research to see if this was the case. Because, you know me, I have to have my girls back, especially when it comes to finances.
So what I found out was that this money is from the “enhanced child tax credit” passed by congress this past spring. The first monthly payment of this enhanced child tax credit was on July 15th 2021. These monthly payments ARE NOT free money at all and does not function like the stimulus in the slightest. This enhanced child tax credit actually takes the existing child tax credit, which is the money parents receive per child each tax season, and “enhances” it so that part of the money that parents would receive for their children come tax time is credited to them in the form of monthly payments instead of one large lump sum. This is supposed to help parents get by and get back on their feet after the shit show that was 2020.
But as helpful as those payments are to a lot of families, they could actually create headaches for others, with some people owing money to the government next year. As a result, some parents have already opted out of the monthly payments and are instead choosing to receive the entire child tax credit next year when they file their taxes. Keep in mind, the IRS is making these payments based on your last tax filing; that’s your income from 2020 (yes I had to say the name of that awful year). It's the government's best guess about what your family is due. Half of the tax credit is being paid out now in monthly payments through December. You then claim the rest when you file taxes next year. But a lot of things can change from year to year.
Consider Opting Out of the Enhanced Child Tax Credit if:
You Made More Money in 2021 Than in 2020:
Most people made significantly less income in the year 2020 due to COVID-19 than they do in a typical year. So if you are one of those people you will probably end up owing more taxes this year than last year and you may fuck yourself by taking this money monthly, because the payments may be more than you are owed, and then you will end up owing part of the money given to the IRS come tax time.
You Depend On The Big Lump Sum Once a Year:
If you really depend on that big lump sum once a year and you can go without the monthly payments, you may consider opting out of the enhanced child tax credit payments. A lot of people use that large lump sum to pay annual bills that they may not otherwise have the money to pay, such as car insurance and maintenance, tuition, vacation’s, etc.
You're Divorced and Taking Turns Claiming the Credit.
Also, if you are divorced and taking turns claiming your child on your taxes each year, the parents that claimed the child last year (2020) will get the credit, but won’t be claiming the child this year, so they will owe that money back. Just something to keep in mind.
Your Child Is Now Officially an Adult!
If your child turns 18 anytime in the year 2021 (even on Dec. 31, 2021), he or she is no longer eligible for the child tax credit at all. So you will definitely be owing all of that money back come tax time. BE AWARE! The IRS should have verified this, but if you are getting payments and your child is now an adult or will be in the year 2021 please double check and opt out.
Likewise, if you have a child who turns 6 this year, you may want to double-check that the monthly payment you're getting for that child is correct. The 2021 credit provides up to $300 a month for children under 6 and up to $250 a month for children ages 6 to 17. So if that amount is incorrect, please double check and be prepared for the difference come tax time or opt out.
How To Opt Out:
The IRS has created a website for managing your monthly payments. To stop the payments, you need to create an account with the IRS using a third-party app called ID.me. Heads up: It's not the most user-friendly of apps. You'll need to verify your identity by scanning a government ID as well as your face. Prepare to be patient.
You can also unenroll over the phone, but that may require even more patience.
An important note while opting out: If you're married and filing jointly, both parents need to opt out. If only one parent unenrolls from the monthly payments, you'll still get half the amount deposited into your bank account.
You have an opportunity every month through December to unenroll before the next payment lands. The deadline is three days before the first Thursday of every month.
So if you would prefer having the enhanced child tax credit monthly payments and are prepared for what that may mean for your tax return come tax season for 2021, then continue to enjoy the benefits and I really do hope that these payments are helpful and you use the extra cash responsibly. If you would prefer a lump sum, made more in 2021 than 2020, are divorced and taking turns claiming your children, or your child is no longer under the age of 18 and you want to opt out, you now have the know-how to do so. Also, keep in mind that these changes apply to tax year 2021 only, as it is supposed to help offset the economic impact of 2020. I just figured this information would be helpful to parents who don’t know exactly what this money was for, and I hope it was helpful! Until next time Money Talkers! :)