On July 15, millions of American families will receive the first of six child tax credit payments.
Some families may have to pay the money back to the IRS if they receive more than they're owed.
"There will be a reconciliation," said Trenda Hackett, CPA and technical tax editor of the tax and accounting business at Thomson Reuters. "There could be some instances where your payment was in excess of what you were actually allowed on your tax return."
The expanded child tax credit is part of the American Rescue Plan, signed by President Joe Biden in March. For the 2021 tax year, the credit increased to $3,000 from $2,000 for dependents ages 17 and younger. It also gives an additional $600 for children under the age of 6.
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Most families will get the first half of the credit in advance monthly payments from July to December, unless they opt out, in which case they'll receive the full credit in a lump sum when they file their taxes in 2022. The monthly amount will be $250 for children ages 6 to 17 and $300 for children under 6 in families receiving the full credit.
The full enhanced credit is available to all eligible children in families with adjusted gross income of less than $75,000 for single parents and $150,000 for a married couple filing jointly. It ends for individuals earning $95,000 and married couples filing jointly making $170,000, though they'd still be eligible for the regular child tax credit, meaning they'd get lower monthly payments starting in July.
If your income went up in 2021
The IRS is calculating eligibility for the advance payments using the adjusted gross income and number of dependents from 2020 or 2019 tax returns. For some families, that information is outdated and could change their eligibility for the child tax credit.
One reason that a family might receive excess payments is if their adjusted gross income went up in 2021. It could mean that they are eligible for less of the credit than they'd received, and in some cases, they will owe the IRS.
Of course, it could also mean that when they file their 2021 taxes, they'll receive less of the second half of the credit, which is fully refundable and will either offset any taxes owed or be returned in a refund. If the remaining credit they're eligible for isn't enough to offset what they owe, they'd have a bill from the IRS.
A family may also owe the IRS if they had claimed more dependents in a previous year than are eligible for the credit in 2021. That could result in having to pay the payments back, according to Hackett.
If you split custody of dependents
People who split custody of children could run into issues if they switch who claims the dependent each year, according to Hackett.
If one parent claimed the child in 2020 but won't claim them in 2021, they may get advance payments that they'll have to pay back when they file taxes next year.
To avoid this, or any other issues, it may make sense for people in this situation to opt out of the payments altogether and have the parent claim the full credit as a lump sum.
"Divorced parents should probably just opt out to keep the peace," said Hackett.
If your child turned 18 in 2021
The enhanced child tax credit extended the benefit to children who are 17 in 2021, but those who turn 18 during the year may not be eligible.
The IRS will use 2019 or 2020 returns to determine how much money is sent but will reconcile the credit based on the age of children on Jan. 1, 2022.
That means that if you have a child who turns 18 this year, they may not be eligible for the child tax credit after all, though they may qualify for other benefits depending on their situation.
"If you have a 17-year-old on your 2020 tax return, but they're going to be 18 by the end of 2021, they won't qualify," said Hackett.
This means you may be on the hook for any payments sent to your family.
There's time to update your information
Most families will receive some benefit through the expanded child tax credit, and very few are likely to have circumstances that would mean they have to pay back any of the advance payments.
Still, for those who are worried they may be overpaid and want to avoid a tax bill, there are a few options.
The IRS in June released several tools for families to update their information with the agency. With the Child Tax Credit Update Portal, families can see if they're enrolled for the advance payments and opt out.
Doing this will ensure that they don't have to pay any of the credit back to the IRS, as they'll get what they're owed when they file 2021 taxes. In the future, this portal will also allow families to update their bank account information.
Families can also check their eligibility through the Child Tax Credit Eligibility Assistant.
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