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Child Tax Credit: will I have to pay back the money?

The IRS has confirmed that the monthly payments will begin from 15 July, but some may choose to opt out of the new system to avoid risking a larger tax bill.

The IRS has confirmed that the monthly payments will begin from 15 July, but some may choose to opt out of the new system to avoid risking a larger tax bill.

The American Rescue Plan provided a complete overhaul of the Child Tax Credit when it was signed into law in March 2021. From 15 July, families eligible to receive the federal support will receive the money in the form of a monthly direct payment, rather than as a single annual tax credit.

Families will now be able to receive up to $300 per child on a monthly basis for the rest of 2021 with the White House already hoping to extend the programme to the end of 2025. They claim that this will help to halve the number of American children living in poverty, but they could be some drawbacks with the monthly payments.

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You could end up having to repay your Child Tax Credit payments

Much like with the three rounds of stimulus checks, eligibility for the financial relief is largely based on the recipient’s adjusted gross income (AGI). Individuals with an AGI of less than $75,000, or married couples with a combined AGI of less than $150,000, will be entitled to receive the full amount form the Child Tax Credit.

The new system of monthly payments is essentially just an advance on the tax credits that are typically applied at the end of the tax year. This means that the upcoming monthly payments will replace the annual credit that would otherwise have been claimed at the start of 2022.

Eligibility now is based on last year’s tax filing but some households will experience an increase in their AGI before they file their 2021 tax returns, meaning that they may be eligible for less than originally thought. In this instance, the deficit would be added onto the recipients’ tax bill.

Gail Rosen, a certified public accountant, explained this to Oregon Live recently. She gives the example of a family whose 2020 tax return had suggested they could receive the full $3,600 maximum entitlement for a child under six.

Rosen says: “But let’s assume when you file your 2021 tax return, your adjusted gross income turns out to be higher than 2020 and you’re only eligible for a child tax credit of $1,000.”

“Then you would be required to pay back $2,600 with your 2021 tax return — $3,600 received in advance, less the $1,000 child tax credit, which would equal $2,600 due back to the IRS.”

How to opt out of the Child Tax Credit monthly payments

If you would rather not risk having to pay back a proportion of the money you receive in the monthly Child Tax Credit, you can easily opt out of the new programme. The IRS is setting up the online portals through which the new system will be administrated, which are expected to go live from the start of July.

Full details have not yet been announced but IRS Commissioner Charles Rettig has said that the tax authority will make opting out as easy as possible, promising to “make forms and instructions available for folks who want to opt out.”

Anyone eligible for the Child Tax Credit will automatically be switched to the monthly payments, but anyone who opts out will get a single tax credit instead. Recipients of the annual credit will also benefit from the more generous programme, which will be worth up to $3,600 per year for children under six and $3,000 for those aged between six and 17.