If you’re a parent with children under the age of 17, you likely noticed a check or direct deposit from the IRS in July, and then again in August. Those in the know realize that this is part of the “American Rescue Plan” for 2021, expanding the child tax credit and making advance payments of that credit to families.
In case this caught you by surprise, here is a little background about the child tax credit and how it has changed for 2021:
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- In recent years most tax filers with children under the age of 18 received a tax credit of $2,000 per child when they filed their taxes.
- This year that amount has increased for most tax filers. The tax credit for children ages 6-17 has increased to $3,000, and for children 0-5 the credit has increased to $3,600.
- In the case that a household earns over $150,000 a year (married filing jointly), the tax credit does not increase and remains the same as previous years.
- Half of the tax credit will be paid in advance. Half of the total child tax credit for your household will be paid in monthly installments beginning in July of 2021.
To sum it up, if you have children you will receive a higher tax credit and half of it will be sent to you before tax time in monthly installments. Here’s a simple example. If you have two children between the ages of 6 and 17, your total child tax credit will be $6,000. $3,000 will be paid to you in advance monthly installments of $500 from July-December. The remaining $3,000 can be accounted for after filing your taxes in early 2022.
What Ministers Should Know
Those who have been in the ministry for even a short period of time know that clergy taxes are different. Clergy have a strange dual status in the tax code, and therefore personally elect the amount of taxes to withhold and pay in each year, rather than having their employer use a formula for withholding taxes.
Many clergy have this down to a science, so that when tax time comes they have paid in just what they need to and get little to no return after filing federal taxes. This is where the advance child tax credit may cause a surprise problem. If a minister has the child tax credit calculated into her or his tax withholding, then by receiving these payments in advance they may end up owing more during tax time.
Let’s go back to that example of a minister with two kids between the ages of 6 and 17. Last year she got $4,000 in child tax credit. But because she factored it into her taxes, she simply paid less taxes rather than receiving $4,000 in cash at tax time. This year her tax credit has increased to $6,000. However, $3,000 is going to be paid in advance in cash. If she does nothing to adjust her tax withholding strategy, she may owe $1,000 when she files her taxes.
The Bottom Line
The bottom line is that if you aren’t sure how the advance payments will impact your overall tax picture, you may want to save those monthly installments until you’ve filed your taxes. The worst case scenario is that you’ll have to pay in some of those installments to cover your tax obligations. The best case scenario is that you will have that money in early 2022 to invest, save, or spend depending on your specific needs.
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