This weekend brought a report from an outlet called BGR Media about the child tax credit that is due to start hitting bank accounts in the next few weeks. This child tax credit is being paid to eligible recipients in advance; typically, at the rate of $250-$300 a month depending upon the age of the child. Divorcing couples may be calling their Divorce lawyers to figure out how this will be split.
As with all “free lunches” the meal is starting to smell like it was left out too long. According to BGR’s experts, your monthly tax credit only works if you have income tax due at the end of the year to take the credit against. Many people who earn modest incomes often use their federal tax withholding to build up a small surplus; triggering a tax refund when they file the next year. Those people may find that unless they have federal tax due on April 15, 2022, their credit will need to be repaid to the government. How about rolling it forward to the following tax year? That’s not how its structured now.
In practical terms, here’s the rub. Beginning in July, the IRS is sending you $250-$300 a month. So, your bank account will receive $1500-$1800 by years’ end on December 31. It is designed to help people pay their bills and most people will employ it that way. But wait. Let’s assume that historically you estimate your taxes due and calibrate your withholding to land right at -0- each tax year. You owe the IRS nothing. You have no refund due. Based on current interpretations of the tax law, you owe the government $1500-$1800 when you file. To put another way, the IRS is effectively loaning you money until next April. If you owe the government $1500-$1800 on April 15, your tax credit will wipe out your “owe”. But otherwise, your loan is due, and you will need to pay back the stimulus.
What’s the solution? Perhaps stay away from the program all together or if you already signed up, keep your monthly stipend in the bank so that it can be repaid. Like so many other tax policies enacted in the last few years, Congress seems to pay little attention to what they are doing. While Washington trumpets that it is answering the call of people adversely affected by the 2020 pandemic. This appears to be a pretty pathetic answer and one which may cause more economic stress than benefit.
Click here for the IRS link to assess your eligibility, but realize that Step 1 may involve engaging your accountant to advise you whether this program is going to be a problem for you.