Christmas in July? Money from the Feds hits YOUR Bank Account
July 28, 2021
By Matt Miner, MBA, CFP®
Many listeners will find new money marked Federal Tax Refund in their checking accounts. If you are the kind of person who usually owes at least some federal taxes, this is your tax credit that would normally reduce what you owe next April 15th; at least at this point, this is not “extra” money like previous stimulus payments.
What can you do?
First, check the bank account where you normally pay your taxes or receive your tax refunds and see if you’re getting these payments. Most people are.
Second, consider whether you want to opt out even if you’ve already received the first payment. Here’s the link to IRS.gov to learn about these payments, and to opt out of these payments, though it’s not quick and easy! In fact, it may be easier to receive the money and adjust your withholdings with your employer!
Third, run a tax projection for 2021 and determine what you will actually owe in taxes for 2021. Then, whether you keep these payments or turn them down, make sure that withholding from your paychecks, or quarterly payments if you’re self-employed, satisfy the taxes you’ll owe for 2021 by December of 2021. If you’d like help creating a tax projection for 2021, please get in touch with me directly.
TRANSCRIPT
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[00:00:01] Matt Miner: It's axiomatic. Surprises are only good if you're under 12 years old, and some surprises are worse than others, like tax bills you don't see coming.
Hey, and welcome to the Work Pants Finance podcast, where I serve up hard-won wisdom about work, life, and money. I teach you how to kill that, build wealth, and avoid the wage slave trap. My goal as a podcaster and advisor is to help you put your money to work so you can own your career rather than it owning you.
I'm Matt Miner, your money guide. For the last dozen years, my family and I killed that and built wealth, and then I started teaching other people how to do the same thing. In 2018, I stepped away from corporate work to serve clients full-time as a fee-only fiduciary financial advisor. Work Pants Finance is the show for MBAs, entrepreneurs and other high-income professionals who want a financial plan that works as hard as you do.
All right. You ask, what's this about surprise tax bills? Well, check your bank transactions about July 14th, 2021. You may find a deposit designated federal tax refund. Is this Christmas in July? Since it's from the feds, of course, the answer is no. It's your child tax credit, possibly an expanded credit arriving early.
This fiscal sleight of hand is a balloon squeeze shifting the timing of when you collect your refundable federal child tax credit and may be setting up a pinch for families in spring of 2022. For 2021, Congress expanded the tax credit from the normal $2,000 to $3,000 for each child between 6 and 17, and $3,600 for each child under six. This expanded tax credit is for families married filing jointly with income up to $150,000, at which point the credit begins to phase out and is fully gone at $180,000. The ordinary tax credit of $2,000 per child begins to phase out at $400,000 for ratepayers married filing jointly, and is fully phased out at $440,000.
Now a tax credit, if you qualify, is a dollar for dollar offset against taxes owed. For families married filing jointly, with modified adjusted gross income above $180,000 but below $400,000, is the group most likely to get an unwelcome surprise at tax time in spring of 2022. For example, a family with AGI of $250,000 would ordinarily expect to use the $2,000 per child tax credit against their 2021 tax bill. This year, that family will receive payments of $1,000 per child between July and December and then will see their tax bill for 2021 reduced by only $1,000 per child rather than $2,000 per child.
I often work with clients to manage their withholdings to target, for example, a $500 to $1,000 federal tax refund. This amount of money feels better than owing money, but it keeps the tax withholding from meaningfully reducing cash flow during the year. In this scenario, a family with three children earning $250,000 and targeting a $1,000 tax refund would expect $6,000 in tax credits to achieve that $1,000 refund target. Instead, they will receive $3,000 in IRS payments between now and the end of the year. This is the IRS paying half their refundable tax credit into 2021 rather than applying it at tax time.
Unless this family proactively adjusts payroll withholdings or quarterly tax payments or opts out of these IRS payments, instead of receiving the $1,000 federal tax refund in the spring of 2022 that they had anticipated and budgeted for, instead they will owe $2,000, the difference between the $3,000 that they received in payments during 2021 and the $1,000 that they had planned to receive as a refund in 2022. This family will still be able to afford it, but they probably won't enjoy the experience. What can you do?
First, check the bank account where you normally pay your taxes or receive your tax refunds. See if you are receiving these payments. Most people are. Second, consider whether you want to opt out even if you've already received your first payment. You can go to workpantsfinance.com/36 for expanded notes from today's show, including a link to the IRS website to opt out of these payments. Or of course, you can just google "opt out of federal child tax credit payments" and find the IRS website that way. Third, run a tax projection for 2021 and determine what you will actually owe in taxes for this year.
Then, whether you keep the payments or turn them down, make sure that you're withholding from paychecks or your quarterly tax payments if you're self employed, satisfy the taxes you owe for 2021 by December of 2021. If you'd like help with your plan, including making a tax projection or deciding whether to keep or refuse these payments, please get in touch at workpantsfinance.com/contact. That's it for today. Until next week. This is Matt Miner, encouraging you to make a financial plan that works as hard as you do.
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[00:05:26] Female Speaker: Matt Miner is a fee-only fiduciary financial advisor and founder and CEO of Miner Wealth Management, a North Carolina registered investment advisor firm that provides personalized, unconflicted advice to clients for a fee. He's also my dad, so please be nice when you talk to him. Matt is a certified financial planner professional and holds a Series 65 securities license. He earned his bachelor's degree in Finance from Arizona State University and his MBA from Duke University's Fuqua School of Business. Work Pants Finance is Matt's financial media business where he talks about work, entrepreneurship, kids, and money, taxes, investing, and other personal finance topics.
Workpantsfinance.com exists to share wisdom and provide general financial information. It is not financial, tax, or legal advice. If you're an individual and probably need personal advice for your specific situation, you should consider building relationships with helpful, caring, and competent professionals who understand your unique context and can provide advice that is tailored to your needs.
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