This is might seem familiar to the 3 or 4 of you that read my emails, but I wanted to get it here on the website where it would be easier to find and reference.
Advance payments of the Child Tax Credit were set to begin July 15 and end December 15, 2021.
For the 2020 tax returns the Child Tax Credit was $2000. The third stimulus bill passed this March (remember that?) increased that credit to $3000 for children 6 to 17, and to $3600 for children under 6.
What is new and different here is that 50% of this credit was paid out in advance. The idea was that it would give families the benefit of the larger credit now; you don’t have to wait until tax time 2021.
But as always, I am seeing some unintended consequences here. Here is an example from my professional organization:
In 2021, Avery is entitled to CTC of $6,000 for her children Riley and Spencer. Avery would receive advance payments totaling $3,000 (50% of $6,000) from the IRS during July through December 2021. She will receive $500 per month ($6,000 / 12 = $500 or $250 per child) each month from July-December 2021. Avery would claim the remaining $3,000 credit when she files her 2021 return.
But here is the catch. If none of this had happened, Avery’s Child Tax Credit on her tax return would be $4000. So Avery’s 2021 refund is going to be $1000 less than her 2020 refund. Yes, Avery already got that $1000, plus an additional $2000, but Avery is not going to be thinking that. Avery is going to be thinking that her refund was $1500 last year, and her income is the same, and she will be counting on that refund and now it is only $500 and she was counting on that money!!
This should sound familiar, since we went through this before with the new tax law and the change in the withholding tables. Your tax was about the same, but your withholding had been decreased, so your refund was less. Remember?
And another thing, unlike the stimulus payments, if your ACTC is overpaid you will have to pay it back. How would that happen? Maybe you share custody with your child’s other parent, and each year you switch who claims the child. The IRS doesn’t know that, so whoever claimed the child in 2020 would have received the payments, even though in 2021 the other parent will be eligible for them. So the 2021 parent will get the full credits, and the 2020 parents will have to pay back what they received.
Or maybe your income increased to where you were not eligible for the full credit anymore. Or maybe you got divorced during the year.
I think this will be the most challenging thing we face this season, and I have a feeling a lot of people are going to be mad at me. So, please give me at least 50% credit for my advance “I’m sorry.”