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Do you have to pay back the Child Tax Credit 2021?

Unlike the stimulus checks paid out, the new advance payments on the Child Tax Credit will have to be repaid if you get more than you are eligible for.

Unlike the stimulus checks paid out, the new advance payments on the Child Tax Credit will have to be repaid if you get more than you are eligible for.
Oisin KeniryGetty Images

Starting 15 July, millions of American families will receive federal financial support in the form of direct payments to help covering the costs of raising children. The payments are an advance on the 2021 Child Tax Credit greatly expanded in the American Rescue Plan passed in March by Democrats.

The Child Tax Credit has been around since the late 1990s and was normally claimed by families as a single annual tax credit when they reported their tax burden. The overhaul of the Child Tax Credit created a monthly payment scheme whereby parents would receive installments on the credit throughout the year.

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Currently, the credit has only been expanded for the 2021 fiscal year and the IRS was given four months to get the payments up and running. This means that families will only get half of the credit split over six installments this year. The other half of the can be claimed on 2021 tax returns next year.

Up to $300 per child each month

Families will now be able to receive up to $300 per child under six on a monthly basis for the rest of 2021 and $250 for each child between six and 17. The White House is hoping to extend the programme to the end of 2025, legislation is being hammered out in Congress but there are no details of how long the extension would be.

Proponents of the programme 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. Some eligible families may choose to opt out of the new system to avoid risking a larger tax bill in the event they receive more than they should.

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. But unlike the Economic Impact Payments, any payments in excess of what a family is eligible for might have to be repaid.

Eligibility now is based on last year’s tax filing, or possibly even a 2019 tax return, 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 set up online portals through which the new system will be administrated, which can be found at the agency’s webpage dedicated to the Advance Child Tax Credit Payments in 2021.

Anyone eligible for the Child Tax Credit is automatically registered to receive the monthly payments if they filed a 2020 or 2019 tax return or has used the Non-Filer online tool set up last year and recently rebooted to sign up for the programme. But anyone who opted out before the July payment deadline 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.