Congress gave a significant tax break to American parents when it passed the American Rescue Plan Act in 2021. Among other changes to the Child Tax Credit, it made 50 percent of it payable as a cash advance before taxpayers get around preparing their 2021 return in 2022.
The advance payment credit is issued to qualifying parents once a month for six months, beginning in July 2021. But there's a catch. Some parents might have to pay some or all of it back.
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How the Advance Payments Are Calculated
The amount of your Child Tax Credit is calculated based on your number of qualifying children and your income. The credit is $3,600 per child up to age five in 2021, and $3,000 per child ages six to age 17. This is $1,600 more and $1,000 more, respectively, than parents received in other years. But that extra bump begins to phase out for parents who earn over certain income levels:
- $75,000 for single taxpayers
- $112,500 for those who qualify as head of household
- $150,000 for married taxpayers filing joint returns
You must subtract $50 from that extra $1,600 or $1,000 for every $1,000 that your income exceeds these levels.
Consider also: How to Calculate the Child Care Tax Credit
Where Does the IRS Get This Information?
The problem here is that the IRS must effectively look into a crystal ball to calculate your 2021 Child Tax Credit so it can send you half in advance. You won't file your 2021 tax return until at least spring of 2022 to let the IRS know how much you earned in 2021 and how many child dependents you could claim.
You must "reconcile" that advance tax credit you received with the 2021 tax credit you would have been entitled to claim when you prepare your 2021 tax return.
That crystal ball is your 2020 tax return, the one you filed in 2021. The IRS bases your credit on the information you included on that return. It will go back to your 2019 tax return if you haven't yet filed for the 2020 tax year.
Consider also: What's Different About the 2021 Child Tax Credit?
Advantages and Disadvantages of the Advance Credit
The IRS could advance you too much money if your circumstances changed from 2019 or 2020 to 2021. Maybe one of your children "aged out" from qualifying for the credit, turning 18 in 2021. But the IRS doesn't know that. All it knows is that you could claim that child in 2020, so it will pay you half of $3,000 based on that year's return. This can result in tax consequences.
You must "reconcile" that advance tax credit you received with the 2021 tax credit you would have been entitled to claim when you prepare your 2021 tax return. But maybe you have two qualifying children this year instead of three. You're entitled to $6,000, not $9,000. But the IRS has sent you $4,500 in 2021 based on that $9,000 figure. You must pay back $1,500 of that $4,500 to the IRS.
A few things can happen at this point. Maybe you're due a $3,000 refund on your 2021 return. The IRS will take that $1,500 from your refund, so you'll only be getting $1,500 now. But maybe you actually owe the IRS $3,000 on that tax return. Now you have a tax balance due of $4,500.
On the bright side, the IRS is offering "repayment protection" to some taxpayers who fall below certain income levels.
You Can Opt Out
Any number of things can change from one year to the next. Your income might rise, affecting your eligibility for the full tax credit. You might divorce and your ex gets custody, so now you don't have any qualifying children. You can waive the advance Child Tax Credit payments at the Child Tax Credit Update Portal on the IRS website. Then you can claim the payment amount of the tax credit you're sure you're entitled to when you file your 2021 return. You can take the payments now, or you can wait.
Consider also: Can You Claim the Child and Dependent Care Credit?
- IRS: 2021 Child Tax Credit and Advance Child Tax Credit Payments ¬– Topic A General Information
- The White House: The Child Tax Credit
- IRS: 2021 Child Tax Credit and Advance Child Tax Credit Payments – Topic H Reconciling Your Advance Child Tax Credit Payments on Your 2021 Tax Return
- IRS: Child Tax Credit Update Portal
- IRS: Families Receiving Monthly Child Tax Credit Payments Can Now Update Their Direct Deposit Information