PODCAST: Get the Most from the Expanded Child Tax Credit

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By David Muhlbaum, Sandra Block

published 12 July 2021

inPodcasts

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David Muhlbaum: Some of us are about to get yet another stimulus from the government. The latest version is the expanded child tax credit, which starting this month means payments to qualifying families. Joy Taylor, editor of the Kiplinger Tax Letter, joins us to talk about how all this will work. Speaking of taxes, as wedding bells ring out again, what does that mean for filers? All coming up on this episode of Your Money's Worth. Stick around.

David Muhlbaum: Right. Yeah. That's why I brought that up, because I feel like we may be on the cusp of an explosion in weddings. Or, not! What I wanted to talk about was a piece Emma Patch wrote for Kiplinger's Personal Finance that was a good solid recap of how marriage affects taxes. And it's not like those rules are really going to affect whether someone schedules a wedding in 2021, but they're good to know and review — you know, personal-finance guidance. But I thought, hey, let's see what the data says, like, are we on the cusp of a wedding boom? Those anecdotes that you and I have, well, that's great, but is there data on this? An economic indicator? Because as we know, there's a ton of money sloshing around the wedding industry. So you would think that people who rent venues, sew dresses, bag bird seed, whatever, they'd want to know. Now, I found a survey from The Knot, the big wedding website that suggested a boomlet. But, it's a survey of their own readers, so it's kind of a self-selecting group.

Sandy Block: Right. To bring another Emma story into it; we've got one in the works. Emma talked to a wedding planner in Portland, Oregon who gave the impression that it's not necessarily full steam ahead, party down for the wedding industry. Because a lot of her clients still have concerns about guests who might be immunocompromised or have family members who aren't vaccinated. Young people — what do you do about that? There are still local regulations in many places about large gatherings. So that's just an anecdote, but it's from someone right in the heart of the business.

David Muhlbaum: Right. That's what we're going to talk about now. Then we're going to talk about children and taxes. So, okay. Marriage and taxes. Now, one of those is inevitable and the other isn't, but when you get married, it can change your tax situation. Now, in the old days, and by old days, I mean before 2017, when you were talking about matrimony and taxes, the word marriage was usually followed by penalty, marriage penalty. It was just one of those things that people like you and me would talk about with the younger people getting engaged. "Well, it's lovely that you and McKayla are tying the knot, but it's a pity about that marriage penalty."

Sandy Block: But nowadays, when someone tells me that their partner doesn't want to get married because of the marriage penalty, I just tell them, "Your partner just doesn't want to get married." Because under the 2017 tax law, the marriage penalty pretty much went away except for the very wealthy. In fact, some couples may actually enjoy a marriage bonus, and what this is all about is the idea of filing jointly, putting the spouse's incomes together. I sometimes hear from people who say, "Well, we'll just file separately and save taxes." No, you won't. The IRS is onto that, and it doesn't want you lowering your taxes by filing separately. But under the current regime, it's very unlikely that filing jointly will result in a higher combined tax bill than you would have if you never got married and just lived together.

Sandy Block: Right. I guess the major one, and this is probably something you should seriously think about if you're thinking about getting married, is that if your spouse commits fraud. Or to be less harsh, maybe your spouse has his own business, and maybe it's not reported all of his or her income. You could be on the hook for that, if you're married. if you're single, you're off the hook. So certainly file separately if you think that the IRS has the goods on your spouse.

David Muhlbaum: Welcome back to Your Money's Worth. The American Rescue Plan, remember that, is still pumping money into the economy. The latest flow starts this month with advanced payments from the IRS, for the expanded child tax credit. Unlike earlier stimulus efforts that went extremely wide with the goal to put cash in the pockets of just about every taxpayer as quickly as possible, the expanded child tax credit is a more tailored affair. Like number one, you've got to have kids, but that's not all there is to it, and a range of income limits apply. Joy Taylor, the editor of the Kiplinger Tax Letter will help us sort out this complex program to make sure you can take advantage of it in the best way for your finances. If you're sitting there thinking, hey, I pay taxes. I don't have kids, what's up with that? We'll touch on those issues a bit too. So welcome, Joy. Thanks for joining Your Money's Worth. First time, right?

David Muhlbaum: A little. I have no doubt that Rocky did the best job imaginable in laying out how the child tax credit worked up until now, because child tax credits aren't new, let's make that clear. And then, how the American Rescue Plan was going to expand it. But at the end, I was still like, oh my God, this is complicated and who is going to remember all those numbers and phaseouts and income levels? That was even before we knew how the government itself was going to administer the program, which is its own new layer of complexity.

David Muhlbaum: Yeah. Yeah, absolutely. Absolutely. That's why we're doing this again. But the problem of the numbers, and the phaseouts, and the income levels, it hasn't gone away. So right off the bat, I want to plug a tool that we've come up with here at Kiplinger, that you can go online and use to see how the expanded child tax credit works for you. It's the 2021 Child Tax Credit Calculator, and it does exactly what it says on the tin. Because, even if we do the most exhaustive explanation possible here today, you're probably going to forget some portion of what we said, and in any case, you'll want to run your own numbers. So "Child Tax Credit Calculator," search those words or look in our show notes. The other thing we're going to plug now, and maybe later, depending on how stuck we get, is Joy's FAQ piece, "Child Tax Credit 2021. Who Gets $3,600? Will I get Monthly Payments?" I'll also link to that in the show notes.

David Muhlbaum: Sorry, Joy. I'm trying to make this easier on everyone, you included. In fact, my first question is going to attempt to skip past all those numbers altogether, and just get you to talk about one of the main things that makes the expanded child tax credit so different. That is, if you qualify, you get some of the money upfront, as Sandy mentioned. Government pays you! So if someone wasn't paying attention to us or lived under a rock or whatever, they could end up having money appear in their bank account, starting July 15th, just like that.

Joy Taylor: Yes. That's true, David. The expanded child tax credit allows for advanced monthly payments of the credit. It's sort of based on the stimulus payments from earlier, from last year, and then earlier this year. People who, eligible families who qualify, will receive, starting July 15th, a monthly payment, per child. A monthly credit per child, depending how many children they have, their income, et cetera, for six months this year. So it'll be July 15th and pretty much the 15th of each month until December. They'll be getting these payments of this child credit up front. That puts more money in peoples' pockets to help them, to help them pay their rent, their mortgage, food, or whatever they want to do with the money. Remember, the payments are an upfront sort of advance of a child credit that will be taken on your tax return that you file next year.

Joy Taylor: So it all depends on the number of children you have and the age of the child. So the most money is $3,600 per child under the age of six, $3,000 per child from age six through 17. So when you're talking about, that is the total annual credit per child that you have. When you're talking about advanced payments, you're talking about at least $300 per month, per child under age six, $250 per month, per child age six to 17. Let's say you have two children, one five, one 10, you'll be getting, and your income, you qualify for the full credit. You could get payments per month of $550.

Joy Taylor: Sure. I think the easiest way to do this is to first discuss the rules that were in effect prior to 2021, prior to this year. So the income levels that were in effect for 2020 was $200,000 for single people and $400,000 for married people. So if your income levels exceeded that, that's when the child credit started to phase out. For 2021, you still have those $200,000 and $400,000 income levels for the $2,000 child credit. But for the people who qualify for the higher child tax credit of $3,000 or $3,600, based on the age of the child, those income levels are different, they're lower. So those income levels are $75,000 for single people, $150,000 for married people. So you have two different income levels: You have income levels to qualify for the higher child tax credit of $3,000 or $3,600, and you have the income levels to qualify for the $2,000 child tax credit.

Joy Taylor: Yes. To get the bigger new one, the income limits are $75,000 for single people and $150,000 for married people. By the way, that's adjusted gross income figures, not taxable income figures. One thing though that I should just clarify when we go back to the advanced payments is, people who only qualify for the $2,000 child tax credit — so people with higher incomes, I mean, wealthy people; I'm talking about, up to $400,000 if you're married — you still will get advanced monthly payments.

Joy Taylor: That is right now. So yes, the program is only for 2021. So in 2022, the income levels and ..the higher income levels and the $2,000 child credit will come back. All the advanced payments and the higher child tax credit would go away. However, lawmakers want to make this permanent. As I said, this is a, I'd mentioned before, it's an anti-child-poverty program. So lawmakers, especially Democratic lawmakers, want to make the program permanent. President Biden had proposed for it to go through 2025. He wants to make it permanent too. That's just solely, 2025 is just because of a federal budget issue. But Democratic lawmakers want this to be a permanent, essentially permanent stimulus payments.

David Muhlbaum: Bingo. Okay. That's pretty precise. So in essence, Joy, on one hand, we could look at this from a policy perspective as: The child tax credit is a subsidy for having kids. Now, it's a more generous subsidy for having kids. There will probably be people who are opposed to government spending on the face of it, they may be opposed to government spending for anything. But I'm just curious, kids are popular, but, is there a constituency that pushes back against this?

Joy Taylor: Well, I don't know, when you say pushes back against this. Some might say fiscal hawks and more conservatives might push back against these government programs or a higher child tax credit. However, when you look at history, in 2017, then-President Trump and Republicans passed a tax reform law. That tax reform law actually doubled the child tax credit from $1,000 to $2,000. So, subsidizing children, it's not a partisan idea.

David Muhlbaum: No. That makes sense. That makes sense. But yes, there could still be... I just sort of imagined in my mind, there are people going, "but wait a minute, I pay taxes, too." But I see your point. Children are bipartisanly popular. Again, Sandy, we've talked in the past about, well, how do other countries do it? Definitely, if you look at the tax regimes of countries like the UK and many others, there are specific carve-outs like this, where there is favorable tax treatment for having children. Sandy, you had a question about how this is actually going to work.

Sandy Block: Yeah. Just last week, the IRS Taxpayer Advocate put out a report, a really devastating report about IRS service. How many tax returns have not been processed. How only about five people in the United States actually got through calling? I'm exaggerating, but hardly anybody who called the IRS talked to a person. So I guess this is a program, once again, that we're looking to the IRS to manage. Are they going to be able to pull this off? They already had to do stimulus checks, unemployment benefits adjustments. I mean, we're really asking a lot of an agency that by every indication is underfunded and understaffed. Is that going to be problem, do you think?

Joy Taylor: So there are definite concerns. I mean, IRS has been underfunded for years. They keep losing personnel. They keep having to deal with changes in the tax laws. So, I can understand those concerns, and there very well could be issues in the future. However, I actually was pleasantly surprised by how well IRS handled stimulus payments. That was put on IRS very quickly. IRS did not know that was coming, and that was put on them quickly. Yes. That was a one-time payment, which actually ended up being three times. But the IRS overall, with hiccups here and there, overall did a good job with the stimulus payments. I think because of that, Congress thought that IRS could handle the job of deal of handling, paying out child payments.

Now, it is going to be difficult. IRS had to create all sorts of systems, all sorts of new tools on their website ... they're going out and doing press. They're trying to advertise this credit to everyone. I mean, not just to people with money and people who might listen to this podcast. But also to people in public housing who would qualify for the credit. So IRS has a lot on its shoulders, but I don't know. At the beginning of this, I had thought that IRS would not be able to handle it, now I'm becoming a bit more optimistic. So far they've been meeting the timeframes.

Joy Taylor: Sure. So there are a few things. First off, I guess the first main issue, the first main question is, do you want these child payments? Do you want these monthly payments? Or would you rather take the full credit when you file your tax return next year? As I said upfront, the monthly payments are advances of the child tax credit that you will take on your 2021 return that you're going to file.

Joy Taylor: Right. Right. So some people might want to, instead of receiving monthly payments, maybe they would like a large refund when they file their return next year. So IRS has, well, IRS pursuant to the law because the law requires that IRS allow people to opt out of monthly payments. So these people will still qualify for the child tax credit, but they don't have to receive monthly payments if they do not want to.

Joy Taylor: If you want to opt out, IRS has created a tool, it's called the Child Tax Credit Update Portal. So you go onto that tool online to essentially opt out. You generally have to... If you don't want the payments, you generally have to opt out at least two weeks prior to the next scheduled payment. So it's too late to opt out for the July 15th payment. If you want to opt out for August and the next five payments, then you have to do that I think by early August.

Joy Taylor: Yes. Although that feature is not yet available, it will be on that portal. You can update the portal to provide if there's a change in your income level, if there's a change in the number of children, the age of your children. Because IRS is generally, if you think about this, IRS is generally going to look at your 2020 returns and 2020 information to figure out the amount, if you qualify for advance payments, and the amount. So if your circumstances are changing in 2021, or you know they're going to, then you are going to want to go on to the Tax Credit Update Portal on IRS's website and make those changes.

David Muhlbaum: Got it. Now, we talked about the idea of not receiving the monthly payments because well, you'd rather have the money later or you don't need it right away, that sort of thing. There are good reasons to do that. But it makes me think a little bit of the flip situation, which is when someone not only really needs the money, but that child tax credit could end up being an income to them. What I'm driving at here is the fact that, my understanding is that not only was the prior child tax credit, what's called fully refundable, but the new one is as well. Which means that even if your federal income tax liability is zero, you still get money. Did I get that right?

Joy Taylor: It was only refundable up to $1,400 per child, and only for very low-income people. You had to have at least $2,500 of earned income, meaning you had to have been working, et cetera. All of those limitations are now gone. So now for 2021, the child tax credit is fully refundable, meaning, even if you have no tax liability, you can get the money. You don't, by the way, families do not have to have earned income. So for non-working families, maybe families looking for a job, families on various government subsidies, et cetera. If they don't have any income at all, they're still eligible for the child tax credit payments.

Joy Taylor: Well, exactly, I mean, just think if you have a very low-income family with say, three young children under the age of six. I'm just giving an example. I mean, this family will get $900 a month from July through December, and then the remaining credit. The remaining credit they could take on their tax return, and get refunded for the other half of the portion. Because remember these advanced payments are only for half of the higher child tax credit.

David Muhlbaum: Yes. That's a very good point to make, because we do have, as I said at the start, a lot of dollar values floating around. Yeah. You get the money upfront and you get the money at the back. Seems pretty good if you're going to take it. One other fine slice on the question of it being not only fully refundable, but essentially money for people who really need it. There's some question here, whether you could get over-credited in your advanced payments, and then not be on the hook for adjusting. Can you see what I'm stumbling about, trying to get at here?

Joy Taylor: Yeah. So, yeah. So there are instances where IRS is going to probably pay, I don't know maybe as much this year, because they're only paying half of the credit. But maybe they're paying it to people who don't qualify for the credit at all, or to qualify maybe for much less. There are going to be instances where IRS is going to be paying too much of the child tax credit.. Essentially the payments that you receive are going to be an excess of the child credit that you're actually entitled to when you file your return next year.

Joy Taylor: Well, you might have to give money back. I mean, it all just depends, when you do the whole balancing out, let's say, there might be instances maybe where the advanced payments exceed the total child tax credit that you are entitled to. Some people will have to pay, depending on your income, will have to pay the excess back. This is unlike the stimulus check or essentially the stimulus check, if you got it and then your income is way too high-

David Muhlbaum: That will just about do it for this episode of Your Money's Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and review. If you've already subscribed, thanks, please go back and add a rating or review if you haven't already. To see the links we've mentioned in our show, along with other great Kiplinger content on the topics we've discussed. Go to kiplinger.com/podcast. The episodes, transcripts, and links are all in there by date. If you're still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram, or by emailing us directly at [email protected]. Thanks for listening.

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In his former role as Senior Online Editor, David edited and wrote a wide range of content for Kiplinger.com. With more than 20 years of experience with Kiplinger, David worked on numerous Kiplinger publications, including The Kiplinger Letter and Kiplinger’s Personal Finance magazine. He co-hosted Your Money's Worth, Kiplinger's podcast and helped develop the Economic Forecasts feature.