IRS May Claw Back Advance Child Tax Credit

The federal government will begin sending advance child tax credit payments to an estimated 39 million American families in mid-July. A total of six monthly payments will be made during 2021, representing half of the expected child tax credit eligible taxpayers can use when filing their 2021 tax return. But shifting economic conditions and a rebounding economy could mean that some taxpayers may end up owing more taxes than expected, and might even result in the need to pay back some of the advance payments.

Introduced as part of the American Rescue Plan, the child tax credit payments will be $3,600 per year for children under 6, and $3,000 per year for each child age 6 to 17. The child tax credits are income-based and start to phase out for individual taxpayers earning more than $75,000 annually and married couples filing jointly who earn more than $150,000 annually.

To help ease pandemic-related financial pressure on families, the first half of eligible tax credits will be paid in six monthly payments starting on July 15 and running through December 2021. The remaining portion of the child tax credit will be credited next year when the recipient files their 2021 tax return.

This is where some taxpayers may receive an unwelcome surprise. Because half the child tax credit ($1,800 or $1,500) will have been paid out in advance, only half will remain to offset a taxpayer’s income on their tax return. For example, on a 2020 tax return for eligible taxpayers the child tax credit was $2,000, all of which was credited against income; but on a 2021 return that credit will be only $900 or $750, depending on the age of the child.

Families whose income increases in 2021 due to a return to work, higher wages, sale of property, or other reason may find themselves rising into the earning zone in which the child tax credit is phased out. This may result in owing more taxes than anticipated and could even mean they would have to pay back some – or all – of the advance tax credits paid out during 2021. Divorced couples must also pay close attention to this situation, as the child tax credit payments will typically be sent to the custodial parent.

If you are worried that you might fall into this situation you have the choice of opting out of the advance child tax credit payments, or to accept the payments but set a portion aside to cover unforeseen taxes.

Your first step should be to talk to a tax professional to help determine potential tax liability and make plans to adjust accordingly. For additional information please contact Gray, Gray & Gray at (781) 407-0300.

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