Smart Tax Planning

How those child tax credit checks may affect your tax refund this year

Key Points
  • If you received monthly advance child tax credit payments in 2021, you may get a smaller refund or owe money this filing season.
  • Families may not expect the smaller write-off at tax time, or worse, getting a bill to repay their credits, financial experts say.
  • However, filers may prepare by reconciling payments and working with a tax advisor to estimate 2021 income.
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If you received monthly advance child tax credit payments in 2021, there may be a costly surprise when filing your return.

The American Rescue Plan, enacted in last March, increased the tax break to $3,000 from $2,000 per child under age 17, with $600 more for kids under age 6.

Millions of families received upfront monthly credits, reducing their write-off at tax time, which may trigger a bill, depending on their 2021 modified adjusted gross income. 

"That will certainly be a surprise for folks," said certified financial planner Patrick Amey, an advisor at Financial Advisory Service, Inc. in Overland Park, Kansas.

"And you're not going to know exactly where you fall until you actually file your taxes, given the complexity of the calculation," he said.

Child tax credit eligibility

In 2021, you may have received up to $1,800 in monthly payments per child age 5 and younger, and up to $1,500 for kids between ages 6 to 17, based on 2019 or 2020 income.

However, with pandemic-related job loss and business revenue drops in 2020, you may have earned more in 2021, possibly reducing or eliminating eligibility for the enhanced benefit. 

"That's going to be a rude shock for a lot of folks," said Dan Herron, a San Luis Obispo, California-based CFP and CPA with Elemental Wealth Advisors. "Especially with a big swing between 2020 and 2021 income."

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There are two phase-outs for the child tax credit, reducing eligibility for the 2021 increases and the $2,000 base credit amount. 

The first one begins above $75,000 for single parents or $150,000 for joint filers, and the second starts once modified adjusted gross income exceeds $200,000 for single filers and $400,000 for couples filing together.

With multiple steps, it's not an easy calculation, Herron said. But you can start by comparing bank statements to IRS records and working with a tax preparer to estimate your income.

Watch for Letter 6419

The IRS started mailing copies of Letter 6419 in late December, covering the total advance child tax credit payments received in 2021, and the number of qualifying children used to calculate amounts.

"Be on the lookout for this letter and don't throw it away," said Herron, stressing how it will make the tax return filing process easier.  

Letter 6419 should match the information in the Child Tax Credit Update Portal. However, a married couple filing together may both need to reconcile their payments, Herron said.

Preventing delays

Reconciling the advance child tax credit payments may also cause IRS refund delays, similar to issues in 2020, experts say.

There were still 6.3 million unprocessed returns as of Dec. 18, according to the IRS, including 2020 filings with stimulus check errors.

"This is going to be even worse," said Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

However, you can make sure your payments match what the IRS reports on Letter 6419 or in the portal, he suggests, and communicate as much information as possible with your tax preparer.

It's better to find out if you have to repay part or all of the child tax credit sooner than later, Lucas said.

"You can adjust spending appropriately between now and April to accommodate for that," he said.

(Correction: Tommy Lucas is a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo. An earlier version misspelled his name.)