You're fully vaccinated. Your company is open again, with everyone returning to the office. You got your kiddos, who also got jabbed, into a summer day camp.
Hello, sort of normal summer!
Even better, you're about to get some added monthly cash from Uncle Sam thanks to early Child Tax Credit payments created by the American Rescue Plan coronavirus relief measure.
But you might want to cool your credit celebration jets.
The payments, officially known as the Advance Child Tax Credit (AdvCTC), could pose a problem at tax filing time next year. You might have to pay back some or all of the early tax credit money.
So today, June 21, which has been declared by the Biden Administration as Child Tax Credit Awareness Day, seems the appropriate time to talk about the potential payback complications of getting the credit in advance.
Not taxable, but timing could cause trouble: No, the possibility that you might have to pay back some of the AdvCTC amounts is not because the advance payments are taxable income. They aren't.
The advances are simply that — early distributions of the Child Tax Credit for which you qualify. If the COVID-19 relief bill hadn't created the advance payments, you simply would do what Child Tax Credit filers have done for years. You would just claim it on your 2021 tax return next filing season.
Instead, though, the American Rescue Plan Act (ARPA) beefed up the credit and offers the option of getting the money early. ARPA bumped up the usual $2,000 per child tax credit to $3,600 for children age 5 and younger and to $3,000 per child for youngsters from 6 to 17. Around half of those total amounts will be sent out to eligible families this year.
The intention is good. President Joe Biden and the Democrats in Congress wanted to get folks who've lost money due to the COVID-19 pandemic some replacement cash as soon as possible.
The Internal Revenue Service will start distributing the AdvCTC payments on July 15. They then will be sent to qualifying individuals around the middle of the month for the rest of 2021. Technically, the payments are on the 15th unless that day falls of a weekend or federal holiday. That happens in August, when the 15th is on a Sunday. So that month's check will be issued on Aug. 13.
AdvCTC calculation complications: Sounds simple enough, right? Well …
The possibility that you might have to pay back some of the advance tax credit amounts comes from the way the IRS determines who gets the AdvCTC and how much.
Since folks are still earning money for the 2021 tax year, the IRS' methodology to determine advance amounts depends on taxpayers' prior information. Specifically, the IRS is using individual tax return data it already has on hand thanks to tax returns filed in 2019 or 2020.
But when your final 2021 income amount is, well, finalized, that amount ultimately will determine your precise Child Tax Credit eligibility for this year.
So when your do file your 2021 tax return next year, you'll have to reconcile the remainder of the Child Tax Credit that you claim with the Advance Child Tax Credit payments you get now.
This is necessary because you're only getting around half of the Child Tax Credit early. And the amount you're getting is based on old tax year information, not the actual income data you'll report on your taxes next year.
Differences from prior years: During this reconciliation process, some taxpayers might discover their advance payments total this year was more than what they're actually entitled to claim on their 2021 tax return. In these cases, they'll have to repay that excess when they file next year.
Here's an example of such a payback situation:
You received advance Child Tax Credit payments this year for two qualifying children properly claimed on your 2020 tax return. However, those children were no longer your dependents in 2021. Or they were older in 2021, meaning you should have gotten smaller advance payments.
In either case in the example above, you'll have to add the excess early credit amounts you received for them to your 2021 income tax.
No payback for some: There is a bit of good news in these cases, though. The IRS says some folks might qualify for repayment protection when it comes to erroneously received AdvCTC amounts.
This means you won't need to repay any excess amount if your modified adjusted gross income (AGI) for 2021 is at or below the following filing status based amounts:
- $60,000 if you are married and filing a joint return or if filing as a qualifying widow or widower;
- $50,000 if you are filing as head of household; and
- $40,000 if you are a single filer or are married and filing a separate return.
Your repayment protection may be limited if your modified AGI exceeds these amounts or your main home was not in the United States for more than half of 2021.
Smaller credits for others: However, it's likely that some families who get the early AdvCTC amounts might exceed those repayment protection earnings thresholds.
If you or your spouse got a job after not working in 2020, or a new, higher-paying one, you could be in a higher 2021 tax bracket. And that means a reduced credit.
The Child Tax Credit starts dropping to the prior $2,000 per child level when your modified AGI in 2021 exceeds:
- $150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
- $112,500 if filing as head of household; or
- $75,000 if you are a single filer or are married and filing a separate return.
The credit is cut even more if your 2021 AGI exceeds $400,000 and you're married, filing a joint return, or is more than $200,000 for all other filing statuses.
Opting out of advances: If you see you might hit income triggers that could mean you'll have to pay back some of your Advance Child Tax Credit amounts, you might want to opt out of this year's early credit deliveries.
The IRS is working on an online option that will let you do that.
But don't worry about missing the credit entirely. While the new IRS.gov portal tool will let you opt out of the advance payment program, you can claim the full Child Tax Credit amount for which your entitled in 2021 when your file that tax return next year.
In the meantime, you can find more on the Child Tax Credit and advance payment option in the White House's explanation document; at its special web page, which has questions and answers and more examples of who qualifies; and at the IRS' Advance Child Tax Credit Payments in 2021 web page, also with links to frequently asked questions.
You also might find these items of interest:
- IRS unveils online tool to help nonfilers get advance child tax credit payments
- Advance Child Tax Credit letter going to 36 million; money to follow starting in July
- The child care tax credit is a good claim on 2020 taxes, even better for 2021 returns