Monday, 29 April 2024
Updated on Monday, August 16, 2021
With the second round of advance child tax credit payments starting to arrive for eligible parents, MagnifyMoney asked payment-related questions to more than 1,000 parents with kids younger than 18.
The survey found that 82% of these parents with younger kids think the monthly payments should be extended past 2021. However, confusion remains around elements of the tax credit, including who’s eligible and whether people need to repay it when filing their 2021 tax return.
The American Rescue Plan increased the maximum child tax credit from $2,000 per qualifying child to $3,600 per child younger than 6 and $3,000 per child ages 6 to 17. (The coronavirus relief package also raised the maximum age at which a dependent child can qualify from 16 to 17).
Perhaps the most anticipated (and misunderstood) aspect of the expanded child tax credit is that eligible parents may now get half of the refundable tax credit early in the form of monthly advance payments. These payments began in July 2021 and run through December 2021.
When MagnifyMoney asked eligible parents how they plan to use the money they received through the advance payments, the most common responses were:
However, in breaking down responses by income level, those priorities shift. For eligible parents with an annual income of $100,000 or more, the top two planned uses of advance child tax credit payments are savings (46%) and child care costs or school tuition payments (44%).
Here’s a breakdown of how parents plan to use the money by the other income brackets:
While the second round of checks are now arriving, 4 in 5 parents told MagnifyMoney between July 21 and July 26 that they had received their first payment, which was due to go out July 15. That means 1 in 5 parents were still waiting a week later for the first payment, meaning some will likely also have to wait for their second check.
Those who didn’t receive their first payment may need to update their checking account information with the IRS. The IRS’ Child Tax Credit Update Portal allows parents to:
Future payments are due to go out on Sept. 15, Oct. 15, Nov. 15 and Dec. 15. The deadline to opt out of future advance payments or make changes to the taxpayer’s bank account information is three days before the first Thursday of the month by 11:59 p.m. Eastern time.
When MagnifyMoney asked parents with children younger than 18 whether, to their knowledge, they’re eligible to start receiving monthly payments through the child tax credit program, 75% said yes and 9% said no. But another 16% said they didn’t know, creating confusion.
Again, these numbers fluctuate when broken down by demographic. More than a quarter (26%) of people earning less than $35,000 a year aren’t aware of their eligibility status, compared with 7% of parents with an annual household income of $100,000 or more. This could be because higher-income people can afford the advice of a tax professional or financial advisor.
The Congressional Research Service estimates that up to 96% of families with children are eligible to receive the tax credit, but not all families with children younger than 18 will qualify.
Above a certain income threshold, the amount of the credit begins to phase out. For 2021, the child tax credit income limits are:
|
Child tax credit income limits |
||
|---|---|---|
| Filing status |
Maximum modified adjusted gross income (MAGI) to qualify for the full amount |
MAGI at which the child tax credit can be reduced below $2,000 per child |
| Single |
$75,000 |
$200,000 |
| Head of household |
$112,500 |
$200,000 |
| Married filing jointly |
$150,000 |
$400,000 |
Once the parents’ MAGI reaches the second phase-out threshold, the Child Tax Credit amount is reduced by $50 for each $1,000 (or fraction thereof) of MAGI over those thresholds.
Another source of confusion stems from repaying the credit. Half of respondents tell MagnifyMoney they’ll have to pay back the money they receive through the child tax credit program when they pay their 2021 taxes.
Yes, some taxpayers could end up repaying advance child tax credit payments. This is because the IRS bases monthly payments on either the taxpayer’s 2019 or 2020 tax return, but the monthly payments are an advance on a 2021 tax credit.
Parents who qualified for the credit based on their 2019 or 2020 tax return but no longer qualify for the full credit could owe money to the IRS — or receive a smaller tax refund — when they file their 2021 return. Reasons this might happen include:
Yet, many parents aren’t aware that they can opt out of advance payments. According to respondents, 10% of parents eligible for monthly credits would prefer to receive their credit in a lump sum at tax time but didn’t know how to opt out or forgot.
Once again, these numbers are higher for lower-income people. Only 7% of people with a household income of $100,000 or more were unaware or forgot to opt out, compared with:
One thing most parents agree on — 82%, in fact — is that the monthly child tax credit payments should be extended past 2021.
The numbers are relatively consistent across income levels, but more people who identify as Democrats (90%) say they want the payments extended, compared with 76% of Republicans and 76% of Independents.
Some lawmakers agree that changes to the child tax credit should be extended. President Joe Biden has proposed extending the child tax credit increases for another five years as part of the American Families Plan. But will it pass?
Extending the child tax credit may be popular with voters across the political spectrum, but it could be tough to get the bipartisan support for the tax increases that the Biden administration has proposed to help pay for the American Families Plan.
When eligible parents were asked how the monthly child tax credit payments will impact their mental health, savings and debt, the responses were consistently split by gender, with men believing monthly payments will have a bigger impact on all three.
But lower-income parents tend to be less optimistic about how the payments will impact their mental health. Among people earning less than $35,000, 42% say the money would have a somewhat positive impact on mental health, while 66% of people in the highest income bracket say the money would have a very positive impact.
Numbers were similar when it comes to debt and savings. The majority of lower-income parents (42%) believe the payment will have a somewhat positive impact on debt, while the majority of parents in the highest income bracket (61%) believe the payments will have a very positive impact on their debt.
So what is the best way for parents to use those advance payments? For parents who are behind on their bills or struggling to put food on the table, supporting the family’s immediate needs comes first. After that, here are a few ideas from LendingTree chief credit analyst Matt Schulz.
“Whether you’re starting one or just topping one off, emergency funds are incredibly important,” Schulz says. “That’s never been more clear than it is today. And even if you still have some debt, build that fund while you’re paying down the debt. Otherwise, the first unexpected expense after you pay off your card will just go right back on that card, and you’ll find yourself back in debt in a hurry.”
Consider setting aside advance payments in a high-yield online savings account to earn interest on your emergency fund while keeping it accessible.
Paying off debt — especially high-interest credit card debt — can improve your credit score and help you avoid costly interest payments.
“Americans have done a really nice job throughout the pandemic of being smart with their excess money,” Schulz says. “For example, they’ve used those funds to take a significant bite out of their credit card debt, and that’s a really good thing. It’s unclear just how long this trend will last since card debt has already started to climb again, but I hope it continues.”
“Savings aren’t just for emergencies,” Schulz says. “They’re for retirement, college, mortgage or car down payments, home remodels, dream vacations, weddings and countless other goals. Whatever you’re saving for, the extra few hundred dollars can be a nice addition to your efforts.”
If you’re eligible to contribute to a health savings account (HSA), consider setting aside the advance payments to cover future medical expenses. As a bonus, contributions to an HSA are also deductible on your tax return, even if you don’t itemize.
If you don’t already have a 529 plan set up for your child’s future education costs, advance child tax credits can be a great way to kick-start your savings. Depending on your state’s laws, contributions to the plan may qualify for a tax break on your state income tax return.
MagnifyMoney commissioned Qualtrics to conduct an online survey of 1,013 parents with children younger than 18, fielded July 21-26, 2021. The survey was administered using a nonprobability-based sample, and quotas were used to ensure the sample base represented the overall population. All responses were reviewed by researchers for quality control.
Source: https://www.magnifymoney.com/blog/news/child-tax-credit-survey/
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