Possible repayment of the advance child tax credit

Advance payments for the child tax credit are scheduled to start in July. Some parents will end up owing more taxes next year due to the advance payments. Before receiving the advance tax credit and spending the money, it’s a good idea to determine whether you will owe taxes and be required to pay back the money.

The American Rescue Plan passed earlier this year and increased the child tax credit. The credit for 2021 was increased to $3,000 for each child ages 6 to 17 and $3,600 for children under 6.

Eligible families can receive half of their credit in monthly payments from July through December 2021. If advance payments are received, the other half will be applied as a credit when the 2021 taxes are filed.

The child tax credit is based on income and phases out for single filers earning more than $75,000 and $150,000 for individuals filing married jointly.

If you normally owe taxes when you file your return, receiving the advance payments could cause you to owe more taxes when you file your 2021 tax return. Consequently, it may be a good idea not to receive the advance payments so that you can reduce your tax liability when you file your tax return.

There are other circumstances which could have an impact on the amount of child tax credit that you are eligible for in 2021.

A higher paying job or your spouse going back to work, could affect the amount of your child tax credit. An increase in business income could also have the same effect on your credit.

If you took money out of your retirement account, sold stock or property, and increased your income in 2021, it could also reduce your child tax credit.

A family with a child ages 6 to 17 and eligible for a $3,000 child tax credit who chose to receive advance payments would receive half of it in advance payments. The remaining $1,500 would be applied on the tax return. The child tax credit in 2020 was $2,000. By taking the advance payments there would be $500 less for the credit in 2021 when the return is filed.

If you decide it is in your best interest to opt out of the advance payments, you can use the IRS Child Tax Credit Update Portal. It allows families to verify their eligibility for the payments and to opt out from receiving the monthly payments so they can receive a lump sum when they file their tax return for 2021.

David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at david@yourtaxcare.com