Six Things to Know about Employee Stock Options

Six Things to Know about Employee Stock Options

Employee stock options can be a valuable part of a compensation package. They can also be misunderstood. Here is a quick guide to walk through some of the common questions that we get from clients and prospective clients regarding employee stock options, as well as some additional items to consider.  

There is the possibility you found this blog by searching “employee stock options,” but you may not have options at all (more on that later). There is also a reasonable chance that you do, in fact, have employee stock options available to you (hence why you conducted the Google search in the first place). So, let’s define employee stock options. 


Investopedia defines employee stock options as “a type of equity compensation granted by companies to their employees and executives.” They are considered derivatives because the value of a stock option is derived from the price of the underlying stock. If you own a stock option you do not own the actual stock itself. Rather, you have the right to buy the stock at a predetermined price (the strike price). If the price of the actual stock is greater than the strike price, the option is considered “in the money”. Of course, you’d rather have an option that is in the money than out of the money; an out-of-the-money option is worthless! There are two main types of employee stock options: Incentive Stock Options (ISOs) and Nonqualified Stock Options (NSOs, or sometimes you’ll see NQSOs). They are treated differently than standardized options contracts that trade on an exchange. Standardized options contracts are similar in that they may give someone the right to buy (or sell) a stock at the strike price, but anyone can own them (you don’t have to be an employee of the company). Investors can buy or sell standardized options contracts to hedge risk, generate income, or use them speculatively.

ISOs and NSOs are similar in that they give the employee the right to buy the stock at the strike price. They are also both subject to a vesting schedule. Once options vest, the employee can exercise the option. For example, let’s say an employee is awarded 1,000 options (either ISOs or NSOs) that vest over a four-year period. Assuming that they are still with the company and have met the criteria outlined in the stock award’s plan document, the employee vests 25% after one year passes. They are then able to exercise 250 options (i.e. they buy the stock at the strike price). If the strike price of the stock is $50, the employee can purchase 250 shares for $12,500. This could be a good deal if the market price of the stock is $100/share! However, the option doesn’t have value when the market price of the stock is $25, for example (why would you want to buy a stock for $50 when it is worth $25?).

Before diving into the rest of this blog, I want to remind you that, although taxation is discussed at a high level, I am not a legal tax advisor! Taxes, especially around the various forms of equity compensation, get complicated. That is why there are good tax advisors and CPAs out there! Please remember that this blog is NOT exhaustive and that it makes sense to work with a financial planner alongside your tax advisor/accountant. Let’s continue. 


The big difference between ISOs and NSOs is taxation. Generally, ISOs are more favorable from a tax perspective. ISOs may not be taxable when exercised, whereas the difference between the fair market value and exercise price of an NSOs will be subject to ordinary income tax. Note that exercising your ISOs may trigger the Alternative Minimum Tax (AMT). The AMT is essentially a tax code that runs parallel to the federal income tax code. The purpose of the AMT is to ensure that taxpayers with the tools and resources to greatly reduce their tax bill through deductions etc. still have to pay a minimum tax. Most U.S. taxpayers are not subject to the AMT. Your tax preparer will compare your tax liability that is shown on your “normal” tax return (IRS Form 1040) to the tax liability calculated from the AMT, and the taxpayer will have to pay the higher amount. 

Without going too far down the AMT rabbit hole, let’s get back to ISO and NSO taxation. There is also a difference in how ISOs and NSOs are treated when the underlying stock is sold. ISOs may provide the opportunity to have a larger share of the gain subject to capital gains tax, compared to NSOs. In the case of the ISO, the difference between the sale price and the exercise price could be subject to capital gains rates. Compare that to the NSO, where the difference between the sale price and the fair market value price on the exercise date could be subject to capital gains rates (all else equal, a smaller portion than the ISO). Why is this important? In most cases, the long-term capital gains rates are lower than the ordinary income tax bracket. For example, someone in the 37% ordinary income tax bracket would be in the 20% long-term capital gains tax bracket (well, it could be 23.8%: 20% capital gains tax + 3.8% net investment income tax). I don’t know about you, but I’d rather have most of my gain generated from my ISOs be taxed at 20% (or 23.8%) rather than 37%! It is also worth noting that depending on the state that you live in, there may be a capital gains tax at the state level in addition to federal taxes. To qualify for the more favorable long-term capital gains rate upon disposing of stock obtained from exercising an ISO, one must hold the stock over one year from the exercise date and over two years from the stock option grant date.


How does this change if a company is privately held, compared to a publicly-traded company? In the case of a publicly-traded company, the market value of the stock is pretty easy to determine. Not necessarily the case for a private company. Here in Madison, Wisconsin, there are a lot of people that work for Exact Sciences (publicly traded: EXAS) as well as Epic Systems (private). Both companies have robust equity compensation plans. It is quite easy to find the price of EXAS stock, just ask Siri (she’ll tell you!). On the other hand, try asking Siri to provide you with the price of a share of Epic Systems. Spoiler alert: I tried this, and she will politely respond, “I don’t see the stock ‘Epic Systems’”. Ultimately, Epic obtains an annual assessment of the price of a share of their stock that is approved by the Board of Directors. Disposing of the shares will also be treated differently between a public and private company. If you obtain stock from an employee stock option or another form of equity compensation (assuming fully vested and no remaining restrictions), you can probably sell the stock to any buyer on the open market. With private companies, disposing of the stock typically means that you sell the vested shares back to the company. The stock plan document will describe the logistics of how the transaction occurs. If you sell the stock back to the company, the transaction is subject to capital gains. Taxation of Restricted Stock or a stock option of a private company is typically treated the same as it would a publicly-traded company; however, as always, this is a topic that should be run by your tax advisor.


You might be wondering, what about my RSUs, ESPP, SARs, or other flavors of equity compensation that I have through my employer? A trend that we see within the world of equity compensation is an uptick in Restricted Stock Unit (RSU) awards. An RSU isn’t a direct share of the underlying stock. Rather, the delivery of shares of stock occurs after the RSUs vest. An RSU is granted to an employee and is usually subject to a three or four-year vesting schedule. Taxation occurs, at ordinary income rates, when the RSUs vest and the stock is delivered. Once you own the vested stock, taxation is treated just like any other stock: It depends on 1) the holding period (if it is greater than one year or not) and 2) if the stock is sold at a gain or loss. Employee stock options still exist, of course, but RSUs have become more popular since they usually have some value – unless the company stock goes to $0. In the case of ISOs and NSOs, if the options are out of the money, there is no value (technically there might be some “time value,” which is the concept that an option has more value the further away it is from its expiration date). I’ll leave it to Bill Gates to describe it in a way that I couldn’t do better myself: 

“When you win [with options], you win the lottery. And when you don’t win, you still want it. The fact is that the variation in the value of an option is just too great. I can imagine an employee going home at night and considering two wildly different possibilities with his compensation program. Either he can buy six summer homes or no summer homes. Either he can send his kids to college 50 times, or no times. The variation is huge; much greater than most employees have an appetite for. And so as soon as they saw that options could go both ways, we proposed an economic equivalent. So what we do now is give shares, not options.”

I’ve had many conversations with people and they find themselves using the terms “Restricted Stock” and RSUs synonymously. Restricted Stock (RS) is different from an RSU! Restricted stock is company stock that is granted to you but you have voting rights and the right to dividends during the vesting period. That is not the case with RSUs. From a taxation perspective, the big difference between RS and RSUs is that the RS has the option to make an 83(b) election. If an employee has RS, the 83(b) election allows the employee to be taxed on the grant date, instead of the default of being taxed at vesting. The 83(b) election might make sense when the employee strongly believes that the price of the stock will increase over time. The thought process is that they would rather get taxed on the grant date when the value of the stock is, say $1000, opposed to when the stock vests when its value is $2000, for example. An 83(b) election is risky. There is a chance that one makes the 83(b) election and is taxed on an amount that is higher than the value when the stock vests or is sold at a later date. In that case, the employee overpaid taxes, and cannot get refunded for the overpayment. Therefore, if the employee thinks that the stock price might go down, they might not want to utilize the 83(b) election. Ultimately they should engage with their tax advisor to take into consideration all other tax-related factors in their decision.

Employee Stock Purchase Plans (ESPP) are also quite common. These plans allow employees to purchase company stock with funds deducted directly from their paycheck, usually at a discount (up to 15%). In the case of an ESPP that has a 15% discount, if the fair market value of the stock is $100 (as defined by the plan document), the employee has the opportunity to buy the stock at $85. Taxation upon sale of stock acquired from an ESPP can be a combination of ordinary compensation income and capital gains. The amount of time that you hold the stock from the offering period (when money is deducted from your paycheck) and the purchase period (when the actual stock is purchased) will determine the type and extent of taxation. ESPP taxation is similar to the tax treatment of ISOs, from the perspective of a qualified disposition (generally favorable tax treatment) vs. a disqualifying disposition (generally not as favorable). 

Stock Appreciation Rights (SARs) are another form of equity compensation. We still see SARs, but in our experience much less than RSUs or traditional employee stock options (ISOs & NSOs). With SARs, an employee can profit when the stock appreciates, just like the name implies. Depending on how the plan is set up, the employee can be paid in cash or company stock (taxed as ordinary income upon exercise, regardless if you receive cash or stock). Note that the SAR must be exercised! The payout doesn’t occur automatically when the price of the underlying stock appreciates. Similar to employee stock options like ISOs and NSOs, SARs may have no value, in the case where the stock never appreciates after the SARs were granted. The “gain” (fair market price of the stock minus exercise price) is taxed as ordinary income upon exercise.


As you can see, a taxable event may occur at different stages of the game, depending on what type of equity compensation we are talking about. Many wonder, will I have to pay taxes out-of-pocket? In most cases, you will be able to withhold an amount to account for the tax due from a taxable event. Depending on the type of plan you have, there could be multiple options when it comes to withholding. This is another area where a good review of the plan document will tell you your options. 

In some cases where the employee receives cash (e.g. exercise of a SAR where they get their payout in cash instead of shares of stock), the company may simply withhold taxes in the form of cash, similar to withholding from your paycheck. They will withhold for federal & state income tax, Social Security, and Medicare. In a case where the employee is receiving stock (e.g. RSU vests, shares of company stock are delivered to the employee’s brokerage account), the company may withhold the appropriate amount in the form of shares. In that case, the employee receives an amount of shares net of withholding (I’ve also seen it described as “surrendering” shares). By withholding shares, it allows the employee to avoid paying the withholding with cash. Note that just because taxes are withheld doesn’t mean that a taxpayer won’t have to pay anything out of pocket! In other words, there are cases where the tax withheld was too little, and the taxpayer still owes a portion of their tax liability by the time they file their taxes. 


Investing comes with risk, although not all risks are equal. Obvious statement ahead, but people participating in the many types of employee stock plans mentioned above want the price of their company stock to go up! However, we know that stocks don’t increase exponentially (or linearly, for that matter) into perpetuity. They can be volatile and in some cases can lose significant value. As discussed earlier, in the case of employee stock options like ISOs and NSOs, forms of equity compensation can lose all of their value. Think back to the Bill Gates quote above. All in all, equity compensation plans can provide a unique opportunity for you to save, invest, and grow your net worth. It doesn’t always work out exactly as planned, but if managed appropriately, equity compensation plans can provide an excellent supplement to help you meet your financial goals in a tax-advantaged way. 


Mitch DeWitt, CFP®, MBA

The Case for Using Dividend-Paying Stock in a Yield-Starved Market

The Case for Using Dividend-Paying Stock in a Yield-Starved Market

As we look to the second half of 2021 and take an assessment of the markets one year after the post-pandemic recovery began, it’s frankly difficult to feel anything but extremely relieved and grateful that global markets faithfully marched onward through human tragedy, political turmoil, and the Aaron Rodgers pseudo-holdout that followed a second straight defeat in the NFC title game. Clearly, the market has been more like Tom Brady than Kirk Cousins, continuing to win even though the run has left both Brady and the U.S. stock market’s bull run a bit long in the tooth, but still hard to bet against.

However, as we turn the page on the first half of 2021 and look ahead to 2022, it’s hard to ignore valuations and worry that, like the Minnesota Vikings, money put to work here and now may give us a Kirk Cousins-like vibe sooner rather than later, meaning that we run the risk of overpaying for expectations that may be beyond our grasp or control. In short, valuations matter, and we shouldn’t give stocks or our quarterback a blank check.

But the core issue facing investors should rarely, if ever, be whether to invest, but where to continue to invest, or how to properly allocate their investments. That seems even more important than ever when we look at the following relative performance metrics over the past 12 months (August through July), based on the total return of popular ETFs tracking the following indexes:


S&P 500




Russell 2000


MSCI EAFE (Developed Markets ex: US)


MSCI Emerging Markets


Barclays Aggregate U.S. Bond Index

That’s an impressive throttling by all major stock markets versus the bond market! Looking closer, and perhaps not surprisingly, the relative return of various stock markets appear to be inversely related to the dividend yield generated by each respective index. Here is an approximate 12-month trailing yield for each of the ETFs upon which these stock index returns were calculated:


S&P 500




Russell 2000




MSCI Emerging Markets

I would argue that interest rates played more than a minor role in the relationship between valuations, dividend yields, and the outperformance of high-valuation/low-dividend-paying (or we could use the oversimplified term “growth”) versus the lower-valuation/higher-dividend-paying (“value”) stocks over the past year (and going back over the past several years going back to the Great Recession). When interest rates are abnormally low, the “valuation” of the distant future earnings promised by younger, fast-growing companies is distorted by an abnormally low “discounting” of the future earnings, because the discounting is based on prevailing interest rates. Thus, lower interest rates result in a higher present value calculated for companies that promise massive earnings in the more distant future. 

So what happens should interest rates rise, or even rise dramatically? That would tend to have a more negative effect on the valuations of companies with future projected earnings streams that are more back-end-loaded (meaning the bulk of the future earnings are still several years out from today). We’ve seen this play out in the Russell 2000 and the Nasdaq on trading days when interest rates climb on robust economic data (e.g., a strong employment report), often resulting in considerable rotation out of the growth stocks and into “safer,” or “blue chip” stocks that have lower valuations and, quite often, pay dividends out of the company earnings on a regular basis.

Therefore, while rising interest rates are a substantial risk to bond holdings and, arguably, growth stocks that have dramatically outperformed in recent years, the allure of dividend-paying stocks appears rational from both a risk management and a valuation perspective going forward. This volatility (risk management) and return proposition have always been true, but relative underperformance of dividend payers in recent years may increase the odds that dividend payers will enjoy a more profound comparative risk/return profile going forward.

A study by Ned Davis Research and Hartford Funds compared the relative average annual returns and volatility (measured by the standard deviation of returns) of dividend payers in the S&P 500 versus those companies in the S&P 500 that did not pay a dividend. The study examined return data over a very long period: March 31, 1972, to December 31, 2019. It was discovered the dividend payers enjoyed average annual total returns of 12.9%, which was a dramatic outperformance compared to the average annual total return of 8.6% by S&P 500 component companies that did not pay dividends. The relative volatility characteristics of the dividend payers versus the non-dividend payers were equally profound. The average standard deviation over the study period for the dividend-paying component companies of the S&P 500 averaged 15.6% versus a staggering 24.3% average standard deviation for the non-dividend-paying component companies! The upshot is undeniable: Dividend-paying stocks provided both superior returns and lower risk for their investors, a proverbial best of both worlds.

We also want to share some additional points for those investors who want to harvest some (if not all) of the income from their portfolios: Where else but dividend-paying stocks are you going to find yield today, tomorrow and in the years to come? While the potential for rising bond yields in the future increases the potential that bonds may one day again provide a meaningful income stream for investors, this would very much come at the expense of bonds that have already been issued. In other words, bonds carry interest rate risk, and the further out the maturity for the bond, the higher the interest rate risk. Moreover, bonds also carry substantial inflation risk, meaning that the risk that rising prices will reduce the value of the interest stream (coupons) paid by bonds and also the purchasing power of the principal that is promised to the investor when the bond matures. While stocks, even dividend-paying stocks, carry some interest rate risk and also inflation risk, stocks and particularly dividend-paying stocks have distinct advantages. For one, companies can, to varying extents, pass rising costs of doing business on to their customers. Similarly, dividend-paying companies can increase their dividends over time, while most bonds pay fixed sums of regular interest.

Accordingly, for years, the global stock markets have risen in part on their relative attractiveness compared to bonds in a low-interest-rate environment. These stock markets might continue to do so in a rising interest rate environment, and/or in an inflationary environment. However, not all stocks are equally up to the challenges of rising rates and inflation. Those companies with relatively higher current earnings power and those companies that can increase their income payouts to shareholders should be better positioned to weather either, or both, storms and, therefore, we believe that they can play a very important role in investors’ portfolios going forward.

Stan Farmer, CFP®, J.D. 

Walkner Condon Financial Advisors is a registered investment advisor with the SEC and the opinions expressed by Walkner Condon Financial Advisors and its advisors in this article are their own. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.

Information presented in this article is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed.  

Information in this article does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Readers are encouraged to seek advice from a qualified tax, legal, or investment advisor to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.

Financial Check List for the End of the Year

Financial Check List for the End of the Year

There is a small, but distinct, satisfaction that comes from crossing items off of a list. The immediate sense of accomplishment gives us a boost that propels us to the next thing on the list. Whether it is a chore list on the weekend or items off a grocery list, we, as a whole, increase our productivity when we have a set of priorities. 

Our financial lives would benefit from a task list just the same. As we move through 2021 with Covid still in the news and the stock market enjoying another great year, we should keep in mind that there are still things to accomplish pertaining to our finances. Think of this as a mid-year financial checklist: 

1: Fund your IRA, HSA accounts

If you have personal retirement accounts, such as Roth or Traditional IRAs, be aware of how much you have contributed to this point and how much you plan to fund before April 15, 2022. The maximum contribution amount for Roth or Traditional IRAs for 2021 is $6,000, or $7,000 if you are over the age of 50. Monthly systematic contributions plans are a great way to fund these accounts; however, many of these plans were set up years ago when the contribution limits were lower. You may not be max funding your account if you haven’t increased your monthly amount within the last few years. Health Savings Accounts are another great way to save money in a tax-preferred way. Not everyone is eligible for an HSA, so check to make sure you qualify. The 2021 contribution limit for individual HSA accounts is $3,600 and $7,200 for family accounts. 

2: Complete your RMDs from IRA, Beneficiary RMD

Required minimum distributions, or RMDs, are annual distributions from IRA accounts. In 2020, required minimum distributions were suspended and have been reinstated for 2021. Recent legislation has increased the age for RMDs to 72 for tax-deferred IRA; however, inherited IRA accounts have different distribution restrictions, so be aware if you are the owner of an inherited IRA as you may need to take distributions prior to age 72. RMD’s must be taken by December 31 of each year, except in the year that you turn 72, in which you have until April 1 of the following year. It is the responsibility of the IRA owner to ensure that the total RMD amount due is withdrawn each year and that the calculation takes into consideration all of their tax-deferred IRA assets.  

3: Verify your 401k, 403b Contributions

The maximum amount that employees can contribute to their 401k or 403b accounts for 2021 is $19,500, with an additional $6,500 allowed if the employee is over the age of 50. This maximum contribution amount has been increasing over the last few years so it is important to verify the amount coming out of each paycheck if your desire is to max fund your account. These limits do not take into consideration any match provided by your employer. Most employers offer flexibility in making and changing contribution amounts, so you could increase your amount mid-year if you are not on track. Also, be aware that many of the 401k or 403b plans now offer a Roth option within their plan. This doesn’t affect any Roth IRA contributions. 

4: Check Your Mortgage Rate For Possible Refinance Opportunities

I fully realize that the mortgage refinance discussion is becoming quite repetitive at this point, but it does bear repeating. The current mortgage rates are under 3% for a 30-year fixed mortgage, and the 15-year mortgage rate is in the low 2% range at many lending institutions. We generally advise looking into a mortgage refinance if you are planning on staying in the home for at least 3-5 more years and a rate reduction of at least .5%-.75%. That said, everyone has a different financial situation and should consult with a financial advisor or mortgage specialist prior to making a final decision. For many people who have refinanced within the last few years, another refinance may not be appealing; however, it would behoove you to look into this option again if the variables are in your favor. 

5: Review Your Cash Position, Travel Expenditures

Take time to review your current cash position and the amount of cash you prefer to have at any given time. A person or family’s cash position is an interesting subject within the world of financial advising. We have clients who need six-figure cash positions to feel comfortable, while other clients desire to hold small cash positions as they don’t like “money on the sidelines.” We like to frame this conversation by taking into consideration any other investment and retirement accounts. For example, a client with a large taxable account can afford to get away with a smaller cash position in contrast to a client with all of their non-cash assets in IRA or 401k accounts, where liquidity provisions are more onerous. We strongly believe that every well-built financial plan has a healthy cash position to cover job losses, emergency expenses or unexpected travel. The current low-rate environment is creating a challenge to find a decent return for cash; however, safety is the main job for this portion of your financial plan. 

This is not a comprehensive list, by any means, but I hope this makes you think about a few things to review between now and the end of the year. We are more than happy to discuss any of these items with you and how they pertain to your overall financial plan.

Nate Condon

Preparing Your Finances and Budget for a Post-COVID Landscape

Preparing Your Finances and Budget for a Post-COVID Landscape

We have all heard the overused phrase “new normal” too often. Pundits and media types love to tell us that this is a different time, situation, or environment than we have ever seen before. I tend to look skeptically at these prognostications because history has a way of repeating itself. All of that said, we are all finding our footing in the soon-to-be post-Covid lockdown period. It will feel strange to eat in a restaurant or shop in a store without wearing a mask. This will not, however, be a new normal as much as a move toward “back to normal,” not only in our personal and social lives but also in our financial lives. 

Savings Rates on the Rise

We all were forced to adjust our lives and adapt to a Covid world. We all stayed at home more and limited our exposure to populated situations. A silver lining emerged from this very difficult period in our lives by way of our personal savings rates. Personal savings rates in the United States skyrocketed in 2020. The savings rate in 2020 was almost double that of 2019 and more than doubled the respective rates of 2016 and 2017. This was the direct result of our travel and discretionary spending being greatly restricted; therefore, most people changed their spending habits without necessarily trying to change their spending habits. We didn’t intentionally tighten our budgets. More so, our budgets were tightened for us. For this reason, we need to be cognizant of how our budgets are likely to change again in the post-Covid world. 

In the chart above, 2020 became one of only two years since 2000 that Americans’ personal savings rate eclipsed 10%. Click here for the interactive chart. Source: Statista.com

Pitfalls on the Move Back To Normal

Our economy is emerging from the past 15 months and the US consumer appears ready to spend again. The travel statistics in the U.S., while still low, are strongly rebounding, with nearly nine in 10 Americans preparing to travel in the next six months. Bars and restaurants are also seeing foot traffic slowing moving back to pre-Covid levels. All of this means one thing for our finances – plan or deal with the consequences. We will likely experience myriad influences over the coming months, including the lack of a spending budget and the desire to do everything we couldn’t during Covid – all at once. These can cause major problems to our monthly budget. We should anticipate an increase in our discretionary spending and plan for it. Make a conscious decision to set a monthly budget for spending on dining out, entertainment, and travel.

We should also be aware of the desire to make up for the lost time. For many of us, we haven’t seen a concert, attended a live event, or traveled on vacation in roughly a year and a half. We should fight the urge to make up for that in the next six months. Spread out those more costly, splurge-type purchases over the next year or two. It is important to establish a dedicated travel line item into our budget. This will make it much easier to control those costs. 

Assess Your Financial Situation 

Your financial life is in a different place than it was at the beginning of 2020. Many people have experienced a job change or an increased balance in their cash reserves. Now is the time to re-examine your financial goals and meet with your financial advisor. You may have a former 401k to roll over or room in your existing employer-sponsored retirement plan for additional contributions. The investment markets are in a significantly different place than they were 15 months ago, as well. Have you rebalanced your investment allocation since the pandemic started? Investors should determine if their risk profile has changed. Life events that are the size, depth, and breadth of Covid-19 change us individually and can easily have an impact on our view of risk. For all of these reasons and many more, you should book an appointment with your financial advisor and update your financial plan. If you do not have a financial plan, feel free to reach out to Walkner Condon.

Nate Condon, Financial Advisor

What to Know about the 2021 Advance Child Tax Credit Payments

What to Know about the 2021 Advance Child Tax Credit Payments

In March of 2021, President Biden signed into law the American Rescue Plan which was intended to help ease the economic burden faced by many families due to the Coronavirus pandemic that has affected the world over the last 16 months. This bill had numerous additional benefits included in it, and one of them may impact you or someone you love. It is the Advance Child Tax Credit payments that are scheduled to begin on July 1, 2021. We want to make sure that you know where to go to find out if you qualify and what you would need to do in order to receive your payments.

How Do I Receive the Advance Child Tax Credit Payment?

First off, this child tax credit payment is actually an advance of a portion of your 2021 child tax credit. In order to qualify for the payment, you MUST have filed your 2020 tax return by May 17 of this year. The IRS is currently setting up two portals, both of which will be live by July 1, that qualified individuals can use to manage their child tax credit and update information pertaining to their situation. The second portal is specifically for non-filers or people whose situations – number of dependents, income, etc. – have changed. You will have two options for how to receive this money. As one of the options, you can take monthly payments from July through December of 2021 and receive the rest of the amount you qualify for when you file your return in 2022. The other option allows you to take a lump sum for the total amount in 2022 when you file your return.

What is the Amount of the Child Tax Credit?

The amount of the tax credit per child is based on your AGI from your 2020 tax return, so it is important that you go to the IRS portal to calculate what your advanced tax credit is going to be as well as determine how you would like to receive your money. In order to receive the lump-sum payment, you will need to opt out of the default monthly payment option. The credit will increase the amount of child tax credit from $2,000 to $3,600 for children under six years old. For children 6-17 years old, families will receive $3,000 per child. You can also claim $500 for children who are 17 or 18 years old and full-time college students between the ages of 19-24. There is a requirement that the children be related to you and reside with you for at least six months out of the year.

Are There Income Requirements? 

As far as income eligibility is concerned, married couples filing jointly will be eligible for the full credit if their AGI is below $400,000 and single filers below $200,000. The larger tax credit will begin to phase out if your AGI is above $150,000 for married couples and $75,000 for single filers. The phase-out for heads of household filers is $112,500. The amount will be reduced by $50 for every $1,000 over that threshold. In order to calculate what you are eligible for, visit the Kiplinger 2021 Child Tax Credit Calculator.

Jonathon Jordan, CFP®