Parents in 2021 got a financial boost from the American Rescue Plan, which expanded the child tax credit and gave families monthly checks.
The boosted full credit was $3,600 per child up to age 6, or $300 a month, and $3,000 per child ages 6 to 17, or $250 per month. The funds paid out monthly from June through December equaled half of the total credit.
But getting those monthly checks will leave parents with a smaller credit to claim on their 2021 tax returns.
That could leave some families in for a surprise. Depending on their overall tax situation, some families may receive a smaller-than-usual refund while others may end up even owing money on the tax filing deadline, which this year is April 18.
Take this example: Say you received $1,500 in advance payments, or half of the full credit, in 2021. You would then claim the additional $1,500 when you file your 2021 return. But in 2020, before the credit was expanded, you had a $2,000 child tax credit. You were able to claim $500 more than you will for 2021. Depending on your tax situation, that’s where you could end up owing more or getting a smaller refund than you expect.
And if you got a raise or a higher paying job, it’s possible you’ll have to pay back some or all of the monthly payments you received if your new income level puts you above the eligibility limits or above your 2020 income, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.
That’s because the advanced child tax credit payments were based on 2020 income, not your income in 2021, he said.
“For some taxpayers, income may have plummeted in 2020 due to the pandemic with widespread unemployment throughout the country and many businesses closed or with curtailed operations for extensive periods,” he said. “The reduced income may have generated the advance tax credit payments, which may end up being reversed when the 2021 Form 1040 is filed, reporting higher income, resulting in a partial or full phaseout of the credits.”
Single taxpayers were eligible for the full monthly payments if they had adjusted gross income of up to $75,000. Married couples who file a joint tax return must have had income up to $150,000. People who earned more got a partial benefit, which went down by $50 for every additional $1,000 of income.
Taxpayers who earn too much to qualify for the expanded credit can still claim $2,000 per child — the previous amount available — as long as adjusted gross income is below $200,000 for singles and $400,000 for married people who file joint returns.
If you’re not sure where you land, consider meeting with your tax planner soon so you can prepare, especially if you’re going to have to pay some money back.
In the meantime, keep an eye out for an IRS letter, called Letter 6419, which you should receive by the end of January. The letter will summarize what payments you received from the child tax credit.
“Families who received advance payments need to file a 2021 tax return and compare the advance payments they received in 2021 with the amount of the child tax credit they can properly claim on their 2021 tax return,” the IRS said.
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Karin Price Mueller may be reached at KPriceMueller@NJAdvanceMedia.com. Follow her on Twitter @KPMueller
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