Advance payments for the Enhanced Child Tax Credit are expected to begin next month, but a big question on the minds of many parents is whether they’ll end up having to pay their taxes next year if they spend the money immediately. ‘silver.

For some parents, the answer is probably yes, they will end up owing money next tax season. Others will probably be fine. But all eligible parents should review their finances before spending the payments, according to financial experts.

“It’s not like stimulus checks,” said Nate nieri, a California-based certified financial planner and founder of Modern Money Management. If you receive an overpayment in child tax credits or if your financial situation changes this year and your 2021 tax bill is higher, the IRS may ask you to repay the credit at tax time.

“It’s very important for planning and can easily become a trap for parents,” he said.

Child tax credit payments, which were put in place and expanded as part of the US bailout adopted earlier this year, is $ 3,000 per year per child aged 6 to 17 and $ 3,600 per year for children under 6 years.

Eligible families will receive half of their credit in monthly installments of up to $ 250 per school-age child and up to $ 300 per child under 6 from July to December 2021. The other half will be paid when filing their 2021 income tax return. The credit is based on income and begins to gradually disappear for people earning more than $ 75,000 per year or $ 150,000 for married people filing jointly.

The IRS must send checks to 39 million eligible households on the following dates:

• July 15th
• Aug 13
• September 15th
• October 15
• November 15
• December 15

It’s important to understand that with these payments, the IRS essentially reimburses a tax credit that you usually receive when you file your taxes, said. Ben wacek, a Minnesota-based CFP and founder of Guide Financial Planning.

“If you don’t typically receive a refund, the prepayments could actually cause you to owe more when you file your 2021 taxes,” he said.

For a 10-year-old, the credit was worth $ 2,000 in 2020, which reduced a family’s tax bill by the same amount when they filed their return, Wacek explained. In 2021, the credit will be $ 3,000 for the same child, but half will be paid in advance.

When that same family files their taxes next spring, there will only be $ 1,500 of the child tax credit left to lower their tax bill. All else being equal, they will owe $ 500 more in 2021 than in 2020, Wacek explained.

“For this reason, if you usually owe when filing or reducing your taxes, you may consider opting out of advance payments or setting some aside to cover your tax bill in April,” he said. he declared.

There are a lot of families who could be affected by this. If you moved to a higher paying job, for example, or if your spouse returned to work after being unemployed for most or all of 2020, you could be in a higher tax bracket for the year. next, which might change your tax calculations, said Matthew Saneholtz, a Florida-based CFP with Tobias Financial Advisors.

Also, if you sold a property for a gain and therefore earned more income in 2021, you may eventually have to repay the credit when you file your 2021 tax return because you owe more taxes than the credit n. ‘worth it, Saneholtz said.

If you fall into these categories or can afford not to use credit payments immediately, you may want to opt out, through an IRS portal that will be available soon, or at the very least, save half of each. payment until you file your 2021 Return. “I know [this is] not a funny answer, but no one wants to be surprised at having to pay taxes, ”Saneholtz said.

Divorced parents should also be careful, said Lili vasileff, a Connecticut-based CFP and divorce expert with Wealth Protection Management. “This year marks a unique year for the calculation of child support due to the cash flow and tax credits available for [the] parent with custody, ”she said.

It is likely that the IRS will begin sending advance payments to the parent who claims the child on their tax return in 2020, as the agency typically uses the most recent information on file by default.

“This can potentially pose problems for children who move between parents or households and in shared custody situations”, Elaine maag, an associate researcher at the Urban-Brookings Tax Policy Center, previously told CNBC Make It. This is especially true for parents who alternate years to claim the child tax credit, since one parent would essentially get the credit two years in a row.

There is a safe haven for people earning less than $ 40,000, or $ 60,000 for couples filing jointly. If you earn less than that and receive a Child Tax Credit overpayment this year, you will not need to repay the amount.

Of course, the Safe Harbor does not apply to everyone. A high-income family with divorced parents, where tax year splitting is a more common arrangement, is less likely to be protected in the event of a mistake.

To avoid running into problems, start by taking a look at your 2020 tax return to see where your finances are at. You may also want to consider talking to a financial professional about your situation before the first IRS payment on July 15.

the IRS is also expected to publish online portals in the coming weeks., including one that will help families determine if they are eligible for payments.

One of the portals will allow eligible parents to opt out of the early payment program. This will ensure that eligible families will receive the full child tax credit next year after completing their taxes.

This week, the IRS deployed the non-reporting registration tool for those who haven’t filed taxes in 2019 or 2020 and haven’t already registered with the IRS for pandemic stimulus payments. The tool allows parents and guardians to easily provide the IRS with information about themselves, their eligible children or dependents, and their bank to receive payments.

Confused About How Much To Expect In Child Tax Credits? This calculator can help you estimate.