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Payroll Taxes

Child Tax Credit and Payroll Taxes

September 27th, 2021

Families with kids have been receiving payments directly from the government since July. This helps many families in need, especially during this pandemic. Is this free money? Is it forever? How does it affect your tax liabilities or payroll taxes? If you work and deceive a paycheck regularly, you should understand the implications and adjust the W-4 information for your paychecks accordingly.

First, we can summarize several key facts about the advanced child tax credit.

  • Child Tax Credit has been around since 1997. It was intended to help families with young children to reduce their tax liabilities. In the past, taxpayers typically claimed the credit when they filed their 1040s.
  • The checks you received now are “advance” payments for the credit that the IRS “estimates” your family is qualified for. If you do not receive the credit now, you will be able to claim it on your 1040 tax return. This also means that you may see less refund or even owe taxes when you file your 1040 next year if you take the credit payments now.
  • The advanced payments are for tax year 2021 only unless it is changed in the future. The good news is that the maximum credit amount was increased from $2,000 to $3,000 per year for a child between 6 and 17 from last year, 2020. The maximum credit is $3,600 for a child below 6 years old.
  • The IRS will pay 50% of your estimated credits now starting from July. The other half can be claimed when you file your 1040 return next year.
  • As a matter of fact, the IRS started to estimate the credit and reduced payroll taxes on paychecks in 2020 if the wage earner claimed kids on W-4. That is why you may have noticed that your paychecks were larger even though you did not have a raise since last year.

In summary, the most important change to Child Tax Credit is the amount increased. The advancement payment, either through a direct payment from the IRS or a reduction in payroll taxes on your paychecks, does not change your eligible credit amount or tax liabilities. It is just

a matter of getting the money now or getting it later. Knowing that, you can adjust the number of dependents on your W-4 form to adjust payroll taxes for each paycheck to meet your tax planning needs. If desired, you can even decline the advanced payment now and claim the credit when you file your 1040 return.

Child Tax Credit was previously a tax credit, meaning you need to have income and pay taxes to receive the maximum credit that offset the taxes. With the advanced, direct payment option and increased amount, Child Tax Credit is now more like a social welfare program. It is similar to the Social Security payments for seniors. Social Security protects seniors from extreme poverty. The Child Tax Credits may protect families with children in a similar way. The birth rate in the United States has been declining about 2% per year for the past 6 years, and the rate has been mostly below the replacement rate” since 1971. We can wonder if the Child Tax Credit may reverse the trend somewhat.

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