Expanded Child Tax Credit and Withholdings

[MMMarbleheader]

Per the legislation that got approved this week, it looks like the child tax credit is getting expanded to $3,000 for over 6 and $3,600 for under. AND this will be given in direct payments (opposed to at tax time) starting in July.

Now I think I may have to adjust my W4 because we try to land on $0 back, but that is factoring $4,000 child tax credit at tax time. This is now changed to $6,000 but it looks like $3,000 will be given out ahead of time, leaving $3,000 for tax time, $1000 short if I keep my withholdings the same. Am I missing something?

Thanks!

[ScreamingHeadGuy]

I believe the legislation includes a safe harbor aspect, so that you won't be penalized if your withholding was based on getting the credit at filing time. 

[seattlecyclone]

I don't know the details about any new safe harbor around this expanded child tax credit, but the existing withholding safe harbors should help you out here. As long as you have your withholding set up to take at least 100% of your previous year's tax (or 110% if your AGI is over $150k), you'll not owe an underpayment penalty when you file next year. You may end up repaying part of the prepaid child tax credit, but it's better to borrow interest-free from the IRS than to lend interest-free to them.

[kanga1622]

My plan is to let them pay me monthly if they want and just sock that away to return most of it at tax time. We are right at the edge where our AGI and our credits mean we pay $0 in each year and get about a $200 refund. So if they pay it to us monthly (or whatever it actually works out to be), we’ll actually owe the majority of it back come April. But we can earn a tiny bit of interest on it in the meantime and adjust our withholdings in 2022. With major healthcare changes for us in July, 2021 has a lot of twists for taxes.