Advance Child Tax Credits Could Result In Tax Bill Next Year
The Internal Revenue Service recently sent out letters notifying eligible taxpayers of how the advance child tax credit payments work that are set to begin in July.
These advance child tax credits are not like the stimulus payments. All these payments are is the IRS sending taxpayers their tax refund earlier than usual.
The amount of advance child tax credit payments that a taxpayer will receive during 2021 is based on the IRS’s estimate of the child tax credit amount that would properly be allowed for the 2021 tax year.
The law requires this estimate to be based on two primary sources of information:
•A taxpayer’s 2020 tax year return or, if that return is not available, your 2019 tax year return; and
•Any updated information you provide to the IRS in 2021, including information provided through the Child Tax Credit Update Portal at www.irs.gov/childtaxcredit2021, which will allow taxpayers to update with the IRS their child tax credit information throughout 2021, including any changes in the number of qualifying children, changes in income and changes in filing status.
“Family and life situations can be fluid throughout a given year,” said the IRS’s website. The following list provides examples of changes that could result in excess advance child tax credit payments, which would result with the taxpayer owing the IRS when their 2021 taxes are filed:
•A qualifying child who resided with you may change homes during 2021 and reside more than half of the 2021 tax year with a different individual.
•Your income increases in 2021.
•Your filing status changes for 2021.
•Your main home was outside of the United States for more than half of 2021.
“As a result of these types of ordinary family and life changes, you may receive a total amount of advance Child Tax Credit payments that exceeds the amount of Child Tax Credit that you properly are allowed on your 2021 tax return,” said the IRS.
Adjustments to a taxpayer’s income and filing information can be made online at www.irs.gov/childtaxcredit2021, which will reduce the potential for advance Child Tax Credit overpayments, which taxpayers otherwise might need to pay back to the IRS in 2022.
Those taxpayers who would prefer to keep the larger refund at the end of the year, rather than get some of it spread out over six months, should visit www.irs.gov/ childtaxcredit2021 to opt out of the advance payments.
Taxpayers may qualify for full repayment protection and won’t be required to repay any excess amount if their main home was in the United States for more than half of 2021 and their modified adjusted gross income for 2021 is at or below the following amount based on the filing status on your 2021 tax return:
•$60,000 if married and filing a joint return or if filing as a qualifying widow or widower; •$50,000 if filing as head of household; and
•$40,000 if single filer or are married and filing a separate return. Taxpayers’ repayment protection may be limited if their modified AGI exceeds these amounts or if their main home was not in the United States for more than half of 2021.
Taxpayers should determine what their needs are and decide whether taking the advance payments or opting out is best for them.
In January 2022, the IRS will send taxpayers who received the advance child tax credit a letter providing the total amount of advance child tax credit payments that were disbursed during 2021. This letter regarding advance child tax credit payments will be necessary to file 2021 taxes.
