Many American households with children saw their bank account balances increase on July 15 as the IRS began distributing the first in a series of advance child tax credit payments.
The early payments of the child tax credit — which was increased as part of the American Rescue Plan Act — will continue through December 2021 to families of children ages 17 and under. Ultimately, the advance payments will distribute half of a family’s expected total child tax credit for 2021. Families will receive the other half of the credit when they file their taxes.
Although many view the payments as a positive step, others took to social media to express their concerns.
“I see a lot of people celebrating #BidenBucks like its free money,” reads one since-deleted tweet. “This is a dollar-for-dollar advance on your taxes. You must give EVERY PENNY of it back when you file next year. It’s different from the stimulus money you may have received in 2020 (didn’t require repayment).”
Will people have to pay back the money they receive from the advance payments?
It’s possible, but there are mechanisms in place to prevent that from happening — particularly for the most vulnerable families. In many cases, taxpayers will not have to pay back the money received via the advance child tax credit payments.
On its website, the IRS explains that the payments are “early payments from the IRS of 50% of the estimated amount of the Child Tax Credit that you may properly claim on your 2021 tax return during the 2022 tax filing season.”
A family with a child age 17 or younger that has an adjusted gross income of less than $240,000 per year for a single filer or less than $440,000 per year for a couple filing jointly should be eligible to receive at least some portion of the 2021 child tax credit.
To determine eligibility for the advance payments and to estimate the child tax credit a family will earn, the IRS used 2020 tax returns (or 2019 tax returns if a family’s 2020 return has not yet been processed.)
Because the advanced child tax credit payments are based on an estimate of the 2021 tax credit a family will be eligible for, it is possible some families might have to pay back some of the money.
“If the total (amount of advance Child Tax Credit payments) is greater than the Child Tax Credit amount that you are allowed to claim on your 2021 tax return, you may have to repay the excess amount on your 2021 tax return during the 2022 tax filing season,” the IRS explained.
If a child turns 18 in 2021, for example, that could result in the IRS overestimating a family’s expected child tax credit. It is worth noting that the IRS routinely gets information from the Social Security Administration on valid Social Security numbers, which can be used to determine age. But if, for some reason, a family receives advance payments for a child who is no longer eligible in 2021, the money will likely have to be paid back.
Divorced parents who alternate the years they claim their children as dependents might also encounter a situation where the IRS might send child tax credit payments that would need to be paid back.
But there are protections in place to prevent families from encountering a situation where they would have to pay money back, according to Elaine Maag, a tax policy expert and principal research associate at the Urban Institute-Brookings Institution Tax Policy Center.
She said research shows that very low-income families are the most likely to have changing child custody situations or to have experienced a marriage or divorce. To protect those families from having to pay back money, there is a “hold harmless” provision in the law.
“It essentially says if you’re single and have income of under about $40,000, you’re at no risk of paying back erroneous payments,” Maag said.
Married couples making up to $60,000 are also protected from having to pay back overpayments of up to $2,000 per child because of the hold harmless provision.
If a family’s income drastically increased in 2021 compared to the income indicated on the 2020 (or 2019) tax return the IRS used to estimate the family’s tax credit, the outdated information could result in overpayments of the credit that might have to be paid back.
“It would reduce your refund or increase your tax payment next April,” April Walker, lead manager of tax practice and ethics at the American Institute of Certified Public Accountants, told CNBC. “That’s how it would be paid back.”
Maag said she believes that drastic increases in income resulting in overpayments of the tax credit “will be rare” because families will receive the maximum amount of the child tax credit if they earn anywhere between $0 and $75,000 as a single filer (or $112,500 for head of household) or $150,000 for joint filers.
“Most people won’t go from $0 to a $300,000 per year earnings,” she said. “I don’t think that situation will be extremely common.”
She noted that even if a family’s income went from $20,000 a year to $300,000 a year, the family’s child tax credit would only decrease from $3,000 to $2,000 per child.
“Only half of that is being advanced, so it’s not a huge liability,” Maag said. “And that’s a really high-income family. They can probably absorb that change in their taxes.”
The payments are not taxable income. They are tax credits that reduce a family’s tax bill. Families can choose to opt out of the monthly payments in favor of receiving their child tax credit as a lump sum after filing their taxes using the IRS’s Child Tax Credit Update Portal. The deadline to opt out is about two weeks before a payment is made.
The only way a family will have to pay back the money received in the advanced payments is if the household actually qualifies for a smaller 2021 child tax credit than what the IRS estimated when distributing the payments.
Ultimately, Maag said “we don’t know the exact answer” to how many families this might impact.
A tweet said that “you must give EVERY PENNY” of the advance child tax credit payments back when you file your 2021 taxes.
Because the IRS calculated eligibility for the payments based on a family’s 2020 tax return, it is possible that some families, such as those whose incomes dramatically increased in 2021 or parents who alternate claiming children as dependents, could have to pay some money back.
However, “must” communicates a sense of certainty that is at odds with the reality of the situation. And even families that end up having to pay back some of the child credit will not necessarily have to pay back “EVERY PENNY.” Finally, the law includes protections in place to ensure the lowest-income families will not have to pay back erroneous payments.
We rate this claim Mostly False.