There’s an old joke that goes something like this. What are the nine scariest words in the English language? Answer: “I’m from the government, and I’m here to help.”
The implication is pretty straightforward. The point is that the sprawling federal bureaucracy and its army of representatives can easily make something harder, more complicated than it needs to be, or even make a situation worse when it or they insert themselves into a problem. Even when extending what look like gifts to the general public. Here’s a good example of what we’re talking about, which is also exceedingly relevant to the current moment: The wave of new stimulus checks that are about to start arriving next month, in the form of the prepaid federal child tax credit payments that millions of families are poised to start receiving.
A quick recap about the child tax credit payments, before we share the bad news:
More than 36 million families, by the IRS’ estimate, will likely qualify for the series of six monthly payments, which are set to start on July 15 and run through the end of this year. They’ll include either $250 or $300 per month for each eligible child that a family has, and then whatever amount those six checks add up to together, that same amount will also be delivered to the family next year, too, in the form of a credit when that family files its federal taxes.
While these are a series of stimulus checks that families are just a few weeks away from receiving, you really have to look at them collectively, as one single amount of money that families are eligible for — lawmakers simple decided to chop it up, stretching this benefit out in the process, so that it’s not a one-and-done thing.
What families are actually eligible for is a payment of up to $3,600 for each child under the age of 6, and $3,000 for every child between ages 6 and 17. Half of the amount will be paid as the tax credit next year, while the other half will take the form of monthly checks. But here’s the most important point about all this. If you remember nothing else, remember this:
The monthly checks actually represent a prepaid federal tax credit.
Remember what we said earlier, the joke about being from the government and here to help?
Normally, the federal government would just give you this whole amount next year, after you file your taxes. Because it’s giving you half of the money upfront, though, there’s a danger. And you certainly won’t hear the Biden administration warning about this when it talks about the checks, which it wants to paint as more akin to a lifesaver for families:
As Ben Wacek, a Minnesota-based CFP and founder of Guide Financial Planning, explained to CNBC, “If you don’t usually receive a (tax) refund, then the advance payments could actually cause you to owe more when you file your 2021 taxes” next year. In other words, if you normally owe money after you file your federal tax return — or you generally skate right on the line of getting no refund but owing only a little bit in tax if it all, as hard as this might be to contemplate, you might actually want to think about refusing the upcoming child tax credit payments. So that you don’t have to turn right around and pay them back next year.
Or, at least, you could set aside part of the windfall you get from the child tax credit payments to cover your anticipated tax bill next year.
Tax credits lower your overall tax obligation. What we’re really talking about here is situations when you’re in the red, so to speak, after completing your federal income tax filing — and when this new tax credit is not enough to pull you out of the red.
Nate Nieri, a California-based certified financial planner and founder of Modern Money Management, also told CNBC that “If you get overpaid in child tax credits or your financial situation changes this year so that you have a higher tax bill on your 2021 taxes, the IRS may demand you repay the credit come tax time. ‘This is very important for planning and can easily become a trap for parents.'”