About 61 million American children brought $93 billion to their collective households in 2021 through advance child tax credit payments. Unlike the $1,400 stimulus payments that nearly all households received, the child tax credit could have a big impact on your 2021 returns — and a startlingly high percentage of taxpayers simply don’t know what to expect.
GOBankingRates conducted a poll of 1,000 American adults, and the results showed that of those respondents who did receive the child tax credit, just over 38% expect to see their refunds shrink or even to owe taxes because of the payments they received. Fewer expect no impact on their taxes at all, but a full 34% don’t know how it will affect their taxes one way or the other.
GOBankingRates asked the experts to help sort it all out.
If You Qualified, Expect the Credit To Affect Your Refund
Whether you took the advance checks like most families, opted out to collect in full in 2022, or had a child after the payments were calculated and missed out the first time around, the child tax credit will impact the taxes of all those who qualified to receive it.
“If a taxpayer received an advance Child Tax Credit payment, it would reduce their 2021 tax return refund because they received a portion of their Child Tax Credit as an early payment,” said professor Sakinah Tillman, a tax expert and assistant professor at the University of the District of Columbia David A. Clarke School of Law. “As a result, the remaining 50 percent of the Child Tax Credit will be claimed on the 2021 tax return.”
If you didn’t receive payments but had or adopted a child in 2021, you can claim the credit on your tax return. If you did receive payments, don’t worry, they won’t increase your liability to the IRS.
“The advance Child Tax Credit payment is not considered income and thus, not subject to tax,” Tillman said.
You Might Have To Pay Some or All of It Back
Although advance payments won’t increase your taxable income, many Americans who earned more money than expected in 2021 will receive a very unpleasant surprise — an IRS that wants its money back.
“This season, families who received advance Child Tax Credit payments are calculating what they got to prepare for their 2021 tax returns,” said Luis Rivero, CPA, director of tax at Taxfyle. “The issue is that some families received more than what they should have received from the Child Tax Credit.”
That’s because the credit is phased out starting at $75,000 for single filers and $150,000 for married couples filing jointly — but the credit was calculated based on income from tax year 2020. If your prior year’s returns qualified you for the credit, but you earned more than the threshold allows in 2021, the IRS will be expecting a refund of its own — but higher income is not the only reason that Uncle Sam might want his money back.
“If the taxpayer received too much Child Tax Credit because of a change in dependency status, loss of a child or dependent, or age phase-out of a 17-year-old, then a correction must be made on 1040 Schedule 8812,” said Shannon Christensen, an attorney, author and editor for Thomson Reuters Tax and Accounting. “The taxpayer must, in essence, pay back excess child tax credits received in 2021.”
Very Few Opted Out of the Credit — But Those Who Did Should Get Supersized Refunds
A little less than 5% of the people polled in the survey, the smallest of any group, qualified for the credit but opted out. The results of the study prove what common sense probably already led you to believe — that the vast majority of households took the credit as an advance because they needed the money. Those who didn’t, however, are in for double the windfall when their refunds arrive.
“If you didn’t receive any advance credits, you can claim the entire credit at tax time, so your refund may be a little bigger than usual,” said Kari Brummond, a tax preparer with TaxCure. However, if you received the advance credits, the government already sent you $1500, or $1800 for younger kids, so you only receive $1500 or $1800 at tax time. That can make your refund a little smaller than usual.”
The key to getting it right lies in one crucial government document that’s unique to tax year 2021.
“Taxpayers should have received IRS Letter 6419 with the amount of the advanced Child Tax Credit paid to them throughout 2021,” Christensen said. “This will assist the individual or their CPA/tax accountant in calculating the correct amount of the credit.”
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