Child Tax Credit: Could you end up having to repay some of it?

Vice President Kamala Harris visited Pennsylvania Monday to promote the expanded child tax credit, a payment established by the American Rescue Plan Act passed in March.

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But lost amid the message that the credit will put money in the pockets of parents over the next six months is the possibility that some parents may have to pay that money back.

The American Rescue Plan Act raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6, and to $3,000 per child for qualifying children between ages 6 and 17.

The new maximum credit is available to taxpayers with a modified adjusted gross income (AGI) of:

$75,000 or less for singles,

$112,500 or less for heads of household, and

$150,000 or less for married couples filing a joint return, and for qualified widows and widowers

Eligible families will receive half their credit in the form of monthly payments of up to $250 per school-age child and up to $300 per child under 6 from July through December 2021. The other half will be paid out when they file their 2021 taxes. The credit is income-based and starts to phase out for individuals earning more than $75,000 a year, or $150,000 for those married filing jointly.

So, if the government’s intent is to give parents money for the next six months to help with everyday expenses, why are some of those parents going to have to repay it?

Whether a person has to repay some of the credit in the form of higher taxes owed on 2021 tax returns depends on a person’s income.

“If you don’t usually receive a refund, then the advance payments could actually cause you to owe more when you file your 2021 taxes,” Ben Wacek, a Minnesota-based CFP and founder of Guide Financial Planning, told CNBC.

The $250-$300 payments being sent to families for the next six months are advances on a tax credit that families usually get yearly, said Ben Wacek, a Minnesota-based CFP and founder of Guide Financial Planning.

Wacek gave CNBC this example:

If you have a 10-year-old child, the current Child Tax Credit would be worth $2,000.

That $2,000 is a credit that is applied when you fill out your taxes. It is applied toward the amount of tax you owe.

That means that if you were to owe $7,000 in federal income taxes, when you use the Child Tax Credit, you reduce your tax bill to $5,000 when you filed your tax return.

How will it be different this year?

Take the same situation, where you have a 10-year-old child; but this year, you get a $3,000 (instead of $2,000) credit.

However, half that credit ($1,500) will be paid out to you over the next six months.

The other $1,500 would be used as a credit on your tax return.

So, if you had the same $7,000 tax bill, that would leave you with a $5,500 tax bill.

If you did not take half the credit in advance, and instead took the entire $3,000 credit on your tax return next year, instead of owing $7,000, you would owe $4,000.

“For this reason, if you usually owe when you file your taxes or cut it close, you might want to consider opting out of the advance payments or setting a portion of them aside to cover your tax bill in April,” Wacek said.

Another way you could be required to pay some of the money back to the government is if your financial status changes. If you should happen to get a job that pays more, you could be pushed into a higher tax bracket, causing your tax bill to go higher.

If you take the monthly payments and get less of a credit on your taxes, you will be paying more out of pocket at tax time.

The IRS reminds taxpayers that if there is an overpayment of the Child Tax Credit for individuals making less than $40,000, or couples filing jointly making up to $60,000, you will not be required to repay the amount.

Parents will be given the option to turn down the advance payments. The IRS is setting up a portal that will allow those eligible, but who do not want the advance payments in advance, to opt out of the plan.