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Tax Implications of Monthly Child Tax Credit Payments

Tax Implications of Monthly Child Tax Credit Payments

August 03, 2021
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In July 2021, nearly 40 million U.S. families are set to begin receiving $250 or $300 per month in child tax credit payments through the end of the year.1 But what could you expect at tax time in 2022? Could you end up owing the IRS if you receive your child tax credit payments monthly? Learn more about some of the nuances of this refundable credit and what you may be able to do to avoid unpleasant surprises at tax time.

 

Receiving Your Child Tax Credit Monthly

In March 2021, Congress enacted the American Rescue Plan—a $1.9 trillion stimulus bill that significantly changed the way the federal child tax credit is implemented.2 Prior to 2021, all families with children under age 17 typically would receive a $2,000-per-child credit; effective 2021, families with children under age 6 are likely to receive $3,600, while families with children age 6 to 17 are likely to receive $3,000.

For many families, a portion of this increased child tax credit is expected to be paid out monthly from July to December 2021. Families who are eligible for the $3,600 credit may receive up to $300 per month, while families who are eligible for the $3,000 credit may receive up to $250 per month. Much like the Covid-19 stimulus payments, eligibility for this credit doesn't begin to phase out until you hit $75,000 in income for individuals or $150,000 for married couples.

 

Tax Implications of Advance Payments

Because these monthly payments are essentially an advance on what you otherwise would have received at tax time, there's a real risk of running into unexpected tax issues when you file your return in 2022. For example, because the 2021 child tax payments are based on your 2020 income, they'll be paid out even if your 2021 income renders you ineligible.3 If this happens, you could be required to repay a portion of these funds that you weren't eligible to receive.

However, there are some steps you can take to reduce the risk of overpayment. By inputting your information into the IRS portal and making sure all information is accurate and up to date, you may be able to determine how much of the child tax credit you're eligible to receive.4 If you determine that you've been overpaid and need to remit some of this money at tax time, be prepared well in advance.

You may also opt out of the advance payments entirely by waiving them on the IRS's website. This may be a good idea for those who are right on the income line and may not qualify for the child tax credit. This may help you avoid getting money that you may be required to repay later.

 

Important Disclosures:

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

 

1 https://www.wsj.com/articles/child-tax-credit-expansion-when-does-it-start-who-is-eligible-and-how-much-is-it-11621369448?mod=searchresults_pos3&page=1

2 https://www.investopedia.com/terms/c/childtaxcredit.asp

https://www.forbes.com/sites/elainemaag/2021/06/25/keeping-the-monthly-child-tax-credit-coming-limiting-risk-of-overpayments/?sh=171d747e73d5

4 www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-f-updating-your-child-tax-credit-information-during-2021



 

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