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Pondering potential AdvCTC payback problems

On Friday, the second of this year's Advance Child Tax Credit payments were directly deposited to accounts of families who signed up to get the tax relief measure that way. Those awaiting an actual paper Treasury Department check should see them arrive in their snail mail boxes in a few days.

In most cases, the money, which is a prepayment of the Child Tax Credit (CTC) is welcome.

But in some instances, the early money could cause payback problems for families whose tax situations changed this year.

Child Tax Credit benefits and bump up: Back in March, the American Rescue Plan Act (ARPA) was enacted as yet another way to help ease the economic impacts of the continuing COVID-19 pandemic.

The already popular tax benefit still is a credit, which is great because that's a dollar-for-dollar offset of any tax owed. But the ARPA tweaked the CTC so, for the 2021 tax year, it can go to additional moderate- or lower-income workers.

It's also a bit bigger this tax year. The total CTC is worth up to a maximum $3,600 for qualifying families, instead of the pre-ARPA max of $2,000 a year.

More of it also is refundable, meaning taxpayers who don't have any tax liability can get any excess CTC back as a tax refund.

And best of all for millions of families, half of their 2021 CTC amount is being delivered by the IRS early, hence the nickname Advance Child Tax Credit, or per IRS acronymese, AdvCTC.

Starting in mid-July and through mid-December, the IRS is sending eligible taxpayers $300 for each kiddo age 5 or younger, and $250 for children ages 6 through 17. These payments are automatic and were calculated by the IRS using information it has from families' prior tax year filings.

Potential payback problems: That early distribution, however, could produce payback problems for some AdvCTC recipients.

If their financial and family situations have changed in 2021 versus the 2020 info the IRS used to figure their AdvCTC payments, they might have to pay back some or all of the credit money. There's a safe harbor rule that limits the amount low- and middle-income families who get the payments will have to repay.

Still, the prospect of sending money the IRS gave you this year back when you file your return next year is, to say the least, a distressing prospect.

Opting out of early delivery: To avoid that, some families have run the numbers and decided to opt out of the monthly AdvCTCs.

The IRS has created a special online page, the Child Tax Credit Update Portal, where, among other things, you can end the payments. If that's your decision, the deadline to stop the September and beyond amounts is Aug. 30.

Others families are taking the money and hoping they'll be OK or that they'll find a way to deal with any potential tax bills next filing season. That's not necessarily a good tax move, but an understandable decision by those who need financial help to make current ends meet.

Pondering payback possibilities: The payback prospect has prompted lot of folks to start exploring about possible AdvCTC overpayment relief. Elaine Maag, a Principal Research Associate at the Tax Policy Center (Tax Policy Center), a collaboration of the Urban Institute and Brookings Institution, is a tax expert who's been given AdvCTC payback problems some thought.

Maag offered some suggestions in a recent post at TPC's blog TaxVox entitled "How Can Congress Protect Families Who Receive Excessive Child Tax Credit Payments?" Her suggested answers to her headline question are this weekend's Saturday Shout Out.

I won't spoil it for interested readers, but all families and members of Congress, who in coming weeks will be considering the Democratic budget proposal that calls for added enhancements to the CTC, should give Maag's post a read.

More AdvCTC items: And if you're getting the AdvCTC and need to revise the information the IRS uses to calculate or deliver it, want to stop it, or just want more information on the family-friendly benefit, you also might want to check out these earlier Don't Mess With Taxes posts:

One-stop stoppage: A quick note about that last bullet point. Despite the mention of July, check it out if you're thinking of ending AdvCTC payments.

The July 5 tax moves post has a table with the monthly deadlines through the rest of this year that you must meet in order to stop the payments.

Another quick note about ending AdvCTC amounts. You don't have to re-do the unenrollment each month.

If you decide to stop AdvCTC delivery for September and let the IRS know by Aug. 30, that one action will stop distribution of the October through December credit amounts, too.

One final quick note about unenrolling from the early credit payments. If you're married, even if you file a joint tax return, each spouse must opt out of AdvCTC payments separately. If they each choose to unenroll, they will receive no monthly payments. If only one spouse unenrolls, they will still receive monthly payments, but they will be half the normal amount.

 

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