Personal Finance

You may have to pay back some of the new $3,000 child tax credit

Key Points
  • The American Rescue Plan directed the federal government to issue half a taxpayer's 2021 child tax credit in regular installments starting as soon as July.
  • The payment amount is based on an IRS estimate. Overpayments may result in a smaller tax refund next year or a larger tax bill.
  • The $1.9 trillion Covid relief law offered some protections, like an online portal for recipients to update relevant information. It also shields some low earners from repayment.
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The IRS may start issuing monthly payments of the enhanced child tax credit as soon as July.

But some recipients may have to pay back a portion of those funds at tax time next year.

The American Rescue Plan directed the federal government to issue advance payments of the child tax credit in periodic installments. It's one of several changes that largely benefit lower earners.

Americans would get up to $300 a month per child, if issued according to the federal government's timeline.

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However, the advanced payments are based on an IRS estimate, from available data like income, marital status, and number and age of qualifying kids.

Outdated data may trigger an overpayment of the tax credit — and the need to pay back any excess funds.

"It would reduce your refund or increase your tax payment next April," according to April Walker, lead manager of tax practice and ethics at the American Institute of Certified Public Accountants. "That's how it would be paid back."

Tax returns

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The IRS is using 2020 tax returns (or, if unavailable, 2019 returns) to determine taxpayers' eligibility for the child tax credit and the amount of the advance payments.

The advance payments add up to half of a taxpayer's total credit for 2021. The American Rescue Plan raised the maximum credit amount to $3,000 per kid ages 6 to 17, and $3,600 for younger children.

The remaining half would be claimed during tax season next year.

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Information reported on next year's tax return may differ from current IRS data — and therefore change the total credit amount.

That may happen, for example, if a taxpayer were to have another child in 2021. This may qualify them for an extra $3,600.

A tax bill may occur if a payer's income increases dramatically this year from the income reported on a 2020 return. This may reduce someone's credit amount or disqualify them outright, depending on earnings.

Online portal

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The $1.9 trillion Covid relief measure, signed by President Joe Biden in March, offers a few protections for taxpayers to limit the scope of overpayment.

For one, the law directs the Treasury Department to create an online portal for taxpayers to update information that changed during the calendar year.

Pay attention to when the portal is available. And think about what might be happening in 2021 that might affect the [credit] amount.
April Walker
lead manager of tax practice and ethics at the American Institute of Certified Public Accountants

Per the law, the portal must allow taxpayers to alter the following data: the number of qualifying children (including birth), marital status, significant change in income and other factors the Treasury deems appropriate.

The portal must also allow taxpayers to opt out of receiving advance payments of the tax credit.

When will the portal be available?

The IRS is on schedule to launch the portal by July 1, agency commissioner Charles Rettig said during a Senate Finance Committee hearing last week.  

It's unclear if the agency will include additional details, like change of address or payment method such as direct deposit, tax experts said.

"We will launch by July 1 with the absolute best product we're able to put together," Rettig said. "We are trying to get it as user-friendly as possible," he added.

Families without internet access will be able to update information via other means, such as by paper form or by visiting an IRS office, Rettig said at the hearing.

An IRS office building in the East Harlem neighborhood of New York.
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Advance payments won't start until taxpayers have been given opportunity to update information and opt out, he confirmed.

However, there may not be much time to tweak data before the IRS starts disbursing funds, said Nina Olson, executive director and founder of the Center for Taxpayer Rights.

"If the portal opens July 1, but first payments start July 1, when is your window for opting out or updating?" Olson asked.                                                                                  

However, some administrative snags may be understandable given the short time frame in which the IRS was directed to launch the program, she said.

"[The agency] is being given four months to deliver this thing," Olson said.

$2,000 protection

Lower earners may be protected from having to repay a portion of the funds, though.

Up to $2,000 per child would be shielded from repayment if the error is due to net changes in the number of qualifying children, according to the Congressional Research Service.

However, credit amounts exceeding $2,000 would still have to be repaid.

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Single filers with less than $40,000 in income qualify for the full "safe harbor" amount. (Heads of household and married couples filing a joint return qualify if their income is less than $50,000 and $60,000, respectively.)

The $2,000 protected amount gradually phases out as one's income rises. Single filers with more than $80,000 of income (or, $100,000 for heads of household and $120,000 for joint filers) wouldn't be shielded from any overpayment.

"People shouldn't rely on that," Walker said of the safe harbor.

"What I would tell taxpayers is, pay attention to when the portal is available," she added. "And think about what might be happening in 2021 that might affect the [credit] amount."