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How Child Tax Credit Overpayments Can Occur

How Child Tax Credit Overpayments Can Occur

Except from Kiplinger by: Rocky Mengle  July 16, 2021

You may be wondering why the IRS would send you too much money in the first place. If the goal is simply to give you a 50% advance of your total child tax credit over a six-month period, it doesn’t seem like that would be too difficult. It’s basic math – right?

Well, yes, the math itself is easy…but things change, which can make it difficult to find the right numbers to plug into the computers. For instance, what if your income increases in 2021 to a point where your child tax credit is now partially or completely phased out. The IRS is going to look at your 2020 tax return to calculate the amount of your monthly payment. If your 2020 income was below the credit’s phase-out thresholds, the IRS is probably going to send you the maximum amount each month. However, because of your higher 2021 income, your 2021 child tax credit is going to be lower than expected…which could create an overpayment.

Since the child tax credit phase-out thresholds are tied to your filing status, a similar situation can arise from a change to your family situation in 2021 (e.g., a divorce). For example, imagine that the IRS bases your monthly payments on your 2020 joint return and your 2021 income is lower than the credit phase-out threshold for joint filers. You then use a different filing status on your 2021 return with a lower credit phase-out threshold (e.g., single or head-of-household) that results in a reduced child tax credit amount. That can also generate an overpayment.

If you claim the child tax credit for fewer children in 2021 than you did in 2020, that can result in an overpayment, too. This can happen, for instance, if you’re divorced and you claimed your child as a dependent on your 2020 tax return, but your ex-spouse claims the child as a dependent for 2021 taxes (a common arrangement). In that case, the IRS is going to send you monthly payments for the child. However, since you won’t qualify for the child tax credit on your 2021 return (your ex will), all the money you received from July to December will be an overpayment.

And here’s one more example…your main home must be in the U.S. for more than half of 2021 to qualify for monthly child tax credit payments. If you satisfied that requirement in 2020, but not in 2021, the IRS could end up sending you monthly payments that you’re not supposed to get. That can result in an overpayment as well.

Payback Requirements for the 2021 Child Tax Credit

Now let’s talk about what happens if you end up with a child tax credit overpayment. Depending on your income, you might have to pay some or all of it back as an addition to the tax you owe when you file your 2021 return next year.

Lower-income people get a good deal. If your modified AGI for 2021 doesn’t exceed $40,000 (single filers), $50,000 (head-of-household filers), or $60,000 (joint filers), and your principal residence was in the U.S. for more than half of 2021, you won’t have to repay any overpayment amount. That’s a win for you!

On the other hand, parents with higher incomes don’t get any breaks at all. If your modified AGI for the 2021 tax year is at least $80,000 (single filers), $100,000 (head-of-household filers), or $120,000 (joint filers), you have to pay back your entire overpayment. Ouch!

It’s a little more complicated for people in the middle. All or part of your overpayment might be forgiven if your modified AGI for 2021 is between $40,000 and $80,000 (single filers), $50,000 and $100,000 (head-of-household filers), or $60,000 and $120,000 (joint filers). To determine how much of your overpayment is wiped out (if any), you first need to calculate what the IRS calls your “repayment protection amount.” This is equal to $2,000 multiplied by:

  • The number of children the IRS used to calculate your monthly child tax credit payments, minus
  • The number of children used to calculate the total credit amount on your 2021 tax return.

If there’s no difference between the number of children used to calculate the two amounts, then there’s no overpayment reduction, and the full amount must be repaid. If you have a positive repayment protection amount, it’s then gradually phased-out as your modified AGI increases within the income range above. The phase-out rate is based on how much your modified AGI exceeds the lower limit of the applicable income range. Once your final repayment protection amount is calculated, it’s subtracted from your overpayment to determine how much you need to repay (but your overpayment can’t be reduced below zero).

Here’s an example of how this works: Joe, who is single, claimed a child tax credit for two children on his 2020 tax return (the children are 2 and 4 years old at the end of 2021). As a result, the IRS sent him $3,600 in monthly payments in 2021. However, Joe can’t claim the child tax credit on his 2021 return because his ex-wife is claiming the children as dependents on her return. Since his 2021 child tax credit is $0, the entire $3,600 he received from the IRS is an overpayment. Joe’s initial repayment protection amount is $4,000 (i.e., $2,000 for each child). If Joe files a 2021 return with a modified AGI of $60,000, his modified AGI exceeds the lower limit of the applicable income range – $40,000 – by 50% ($60,000 – $40,000 / $80,000 – $40,000 = 0.5). As a result, Joe’s $4,000 repayment protection amount is reduced by 50% to $2,000. Therefore, Joe only has to repay $1,600 of his $3,600 overpayment ($3,600 – $2,000 = $1,600).

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