The Child Tax Credit is a tax credit that provides financial assistance to families with dependent children. The credit was expanded in 2021 as part of the American Rescue Plan Act to help families deal with the financial impact of the COVID-19 pandemic. While the credit provides much-needed relief for families, there are questions about whether or not the credit needs to be paid back. In this post, we will explore this topic and answer the question: Do you have to pay back the Child Tax Credit?
The Child Tax Credit Is Not a Loan
The first thing to understand about the Child Tax Credit is that it is not a loan. It is a tax credit, which means that it is a direct reduction in the amount of tax you owe to the government. The credit is designed to help families with the cost of raising children, and it is not intended to be paid back.
The Credit Amount Is Based on Income and Number of Children
The number of children in a family and the family’s income affect the Child Tax Credit’s size. The credit has a maximum value of $3,600 for children under the age of six and $3,000 for children between the ages of six and 17 for the 2021 tax year. For single filers making over $75,000 and joint filers making over $150,000, the credit gradually phases out.
The Credit Can Be Received in Advance
One of the most significant changes to the Child Tax Credit in 2021 is that it can be received in advance. Families can receive up to half of the credit amount in monthly payments from July through December 2021. The advance payments are based on the family’s 2020 tax return or their 2019 tax return if the 2020 return has not been filed.
Overpayments of the Credit Must Be Repaid
While the Child Tax Credit is not a loan, overpayments of the credit must be repaid. Overpayments can occur if a family’s income or family size changes during the year or if there are errors in the calculation of the credit. If a family receives more than they are entitled to, they will need to repay the excess amount when they file their tax return. It is crucial for families to plan for the possibility of overpayments by setting aside funds throughout the year, especially if they are receiving advance payments.
By staying on top of their tax obligations through the help of tax resolution/consultation services and understanding the rules of the Child Tax Credit, families can make the most of this valuable source of financial assistance and support the needs of their children.
Repayment Amounts Are Limited
The amount that must be repaid for overpayments of the child tax credit is constrained. The maximum repayment amount for families with incomes under $60,000 is $2,000 per child. For families with income between $60,000 and $100,000, the repayment amount is capped at $1,500 per child. Families with income above $100,000 will need to repay the full amount of the overpayment.
Repayment Can Be Deferred for Certain Families
The IRS has announced that certain families can defer repayment of overpayments of the Child Tax Credit. Families who received advance payments based on their 2019 tax return but had a lower income in 2021 can defer repayment until they file their 2021 tax return.
This will allow families to avoid the financial burden of repaying the overpayment when they may be experiencing financial difficulties. Additionally, families who experienced a qualifying disaster in 2021 may also be eligible for a deferral of repayment. This can include families who were affected by natural disasters such as hurricanes, wildfires, or floods. By deferring repayment, these families can focus on rebuilding their homes and lives without the added stress of repaying the Child Tax Credit overpayment.
It is important for families to understand the eligibility requirements for deferral of repayment and to work with the IRS to ensure that they are taking advantage of all available options for managing their tax obligations. By staying informed and seeking out resources and assistance when needed, families can navigate the tax system with confidence and make informed decisions about their finances.
The Child Tax Credit is a tax credit designed to provide financial assistance to families with dependent children. It is not a loan and does not need to be paid back. However, overpayments of the credit must be repaid, although the repayment amount is limited for families with lower incomes. The credit can be received in advance, but families should be aware of the potential for overpayments and the need to repay excess amounts. By understanding the rules and limitations of the Child Tax Credit, families can make informed decisions about their finances and receive the support they need to raise their children.