Will You Have to Pay Back Your Child Tax Credit Payments?
If you got too much in monthly child tax credit payments last year, you might have to repay some (or all) of the money when you file your tax return this year.
The IRS sent the final round of 2021 child tax credit payments back in December. Overall, eligible families received up to $1,800 in total monthly payments for each child five years old or younger and up to $1,500 for each kid 6 to 17 years old. (Parents with higher incomes didn't receive that much or were denied the credit altogether.) If you have a large family, that adds up to a pretty hefty chunk of change. But what if the IRS sent you too much money – do you have to pay it back? Well…maybe.
The law authorizing the monthly child credit payments specifically says that any excess amounts must be paid back when you file your 2021 tax return if your income is above a certain amount. There are exceptions to this rule for middle- and lower-income families, but they're limited. Plus, the way the monthly payments were calculated, overpayments could be fairly common. So, this could be a big issue for a lot of families.
Changes to the Child Tax Credit for 2021
Before getting into how you may have ended up with an overpayment and the details of the payback rules, it's probably a good idea to go over some of the changes to the child tax credit that apply for the 2021 tax year (and only for 2021). For the 2020 tax year, the maximum child tax credit was $2,000 per child 16 years old or younger. It was also phased-out if your income exceeded $400,000 for married couples filing a joint return or $200,000 for single and head-of-household filers. For some lower-income taxpayers, the credit was partially "refundable" (up to $1,400 per qualifying child) if they had earned income of at least $2,500 (i.e., you got a refund check for the refundable amount if the credit was more than the tax you owed).
The American Rescue Plan, which was enacted in March 2021, made some major changes to the child tax credit for the 2021 tax year. For one thing, the credit amount was raised from $2,000 to $3,000 for children 6 to 17 years old and to $3,600 for kids 5 years old and younger. The $2,500 earned income requirement was also dropped, and the credit was made fully refundable (which means refund checks triggered by the 2021 credit can be greater than $1,400).
There are also two phase-out schemes in play for families with higher incomes in 2021. The first one can't reduce the credit amount below $2,000 per child. It kicks in if your modified adjusted gross income (AGI) is above $75,000 (single filers), $112,500 (head-of-household filers), or $150,000 (joint filers). The second phase-out is the same $200,000/$400,000 one that applied before 2021.
Finally, the American Rescue Plan required the IRS to pay half of your total credit amount in advance through monthly payments issued from July to December 2021 (you could have opted-out if you wanted to). In most cases, the IRS based the amount of the payments on information it pulled from your 2020 tax return. You can claim the remaining half of the credit when you file your 2021 tax return, which is due April 18, 2022. In practice, this will be done by subtracting every dollar you received from July to December from the total credit you're entitled to claim and then reporting the leftover amount, if any, as a child tax credit on your 2021 return. (Use our 2021 Child Tax Credit Calculator to see how much your monthly payments should have been and what should be leftover to claim as a credit on your 2021 tax return.)
For complete coverage of the changes for 2021, see Child Tax Credit FAQs for Your 2021 Tax Return.
How Child Tax Credit Overpayments Can Occur
You may be wondering why the IRS would send you too much money in the first place. If the goal was 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 may have made it difficult for the IRS to find the right numbers to plug into its computers. For instance, what if your income increased in 2021 to a point where your child tax credit is now partially or completely phased out. The IRS likely looked at your 2020 tax return to calculate the amount of your 2021 monthly payments. If your 2020 income was below the credit's phase-out thresholds, the IRS probably sent 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 based 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 probably sent you monthly payments for the child. However, since you don't qualify for the child tax credit on your 2021 return (your ex will), all the money you received from the IRS last year between July and December will be an overpayment.
And here's one more example…your main home had to 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 most likely sent you monthly payments that you weren't supposed to get. That can result in an overpayment as well.
Repayment Requirements for the 2021 Child Tax Credit
Now let's talk about what happens if you ended 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.
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 must 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 were 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).
[Note: You may also have to pay back a portion of your overpayment if your modified AGI is less than or equal to $40,000 (single filers), $50,000 (head-of-household filers), or $60,000 (joint filers) and you lived outside the U.S. for at least half of 2021.]