American Rescue Plan Child Tax Credit Result in Tax Bill After Filing 2021 Taxes?

[aeberspacher]

I'm trying to head off a potential issue I'm seeing I might have when I file my 2021 taxes and want to see if you all are seeing this the same way I am.

My W4 is currently set up to realize I have 4 kids and they're worth $8,000 total in tax credits. As such, my tax withheld from my paycheck is reflecting that. If the new child tax credit changes to be paid monthly starting in July through December, wouldn't that eat up half of that credit that I couldn't claim on my return? My quick math with 4 kids aged 7,6,3, and 1 are my unused portion of the tax credit would be $6,600, resulting in a tax bill of $1,400 more than I thought because my W4 and employer are withholding taxes assuming a $8,000 credit. 

Am I thinking about this wrong? I'm lucky to be in a financial position where I can easily just stash away that $1,400 until tax time comes around and pay it, surprised there aren't more articles about this out there if many families who desperately need this money are all of a sudden going to be hit with a tax liability they weren't expecting. 

Thank you all for your thoughts!

[macuser_22]

Your W-4 and tax withholding has nothing to do with a tax return.   If too much is withheld then  you get a larger refund.     Employers and withholding is not based on the child tax credit because employers do  not know if you qualify for the credit or not.

[ThomasM125]

You are correct, if the child tax credit is paid to you in advance, it would reduce the credit on your tax return which could result in you having to pay some of it back.

[SweetieJean]

Part of the new Child Tax Credit provides  for regular payments of $250 or $300 between July and December 2021 to eligible families. The payments are optional; and if you don't take them, your full credit will be available when you file your tax return in 2022.  State tuned for more details as time progresses.

As an aside, many years ago there was an Advanced Earned income Credit  that worked in a similar way.  Congress eventually did away with it because of inconsistent usage, fraud, and difficulty in administering it.

[aeberspacher]

I disagree they have nothing to do with your tax return. They do have something to do with each other when the amount my employer withholds from my pay is calculated by how I fill out my W4 and the amount my employer paid on my behalf is reported on my tax return as taxes paid against my total tax liability. The issue I'm trying to avoid is under withholding. 

I also disagree that the withholding is not based on the child care tax credit based on the new W4 that started in 2020 that directly asks you in Step 3 if you'll make under $200/$400K and thus be eligible for the child tax credit and then asks you to multiply your qualifying children under the age of 17 by $2,000. The new W4 was created to take this into account (amongst other things). 

[aeberspacher]

Right, this is what I was thinking. 

My fear is without proper messaging John Doe will have no idea this is the case. That the amount they can claim on their return is not $2,000 per child anymore and when tax season comes around, those July - December payments are already burned through. Right now, every article I've read has made this out to be a great thing for families (which it is), but I've never seen one mention how this interplays with your tax return. That messaging is hopefully coming, but I think we all know far too well that 90% of the American public will have no clue how this could bite them come tax season and will not prepare for that bite. 

[Opus 17]

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@aeberspacher wrote:

I disagree they have nothing to do with your tax return. They do have something to do with each other when the amount my employer withholds from my pay is calculated by how I fill out my W4 and the amount my employer paid on my behalf is reported on my tax return as taxes paid against my total tax liability. The issue I'm trying to avoid is under withholding. 

I also disagree that the withholding is not based on the child care tax credit based on the new W4 that started in 2020 that directly asks you in Step 3 if you'll make under $200/$400K and thus be eligible for the child tax credit and then asks you to multiply your qualifying children under the age of 17 by $2,000. The new W4 was created to take this into account (amongst other things). 

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One option is to refuse the advance payments.  The law requires the IRS to create a web site where taxpayers can opt out.  

It is also possible that the IRS will modify the withholding tables in publication 15-T to take this credit into account, so that your withholding would automatically be adjusted whenever the payments start.   Or that the IRS will issue a new W-4 that you can fill out.

Or, you may need to manually adjust your withholding.

No one really knows yet.  The Tax Foundation points out that it took the IRS 2 years to figure out how to make advance PTC payments.  They may not even be able to make the advance payments for 2021.  I think you are best to wait and see.

[guyathome]

(I now see that others had already made this point. Oh well, here is another one.)

Actually, the employer's withholding is based on the W4 form that the employee fills out and gives to the employer, and the numbers on the W4 can reflect the anticipated child tax credit. I ran the IRS's own W4 calculator this week, and it gives the option to account for the child tax credit.

So the net result is that the employers withholding from your paycheck can reflect your anticipated child tax credit.