If you are one of the millions of American taxpayers receiving advance Child Tax Credit payments from the IRS this year, you may be wondering how this could affect your 2021 tax return.

We know changes to your taxes can be confusing and difficult to navigate at the best of times, and the coronavirus pandemic has only added more uncertainty. But there’s no need to stress — we’ve broken it all down for you.

Will I still be getting a Child Tax Credit payment when I file my taxes?

Yes. Under the American Rescue Plan enacted by President Biden in March, eligible families are receiving half of their Child Tax Credit (CTC) paid out in six monthly installments from July through December. These families will then claim the rest of their CTC when they file their taxes next year, as opposed to claiming it all in one lump sum.

If you’d like a review of who qualifies for these monthly payments and how they work, check out our in-depth explanation of the Child Tax Credit expansion.

But how could claiming these advance payments potentially affect your 2021 income tax return? Here are some important things to keep in mind as you think ahead to filing your taxes this spring.

What Child Tax Credit amount will I receive with my tax return?

It depends. Another change to this year’s CTC was an increase in the credit amount from the usual $2,000 per child to $3,000 per child (and up to $3,600 for children ages 5 years old or younger). However, not all parents will qualify for the entire additional credit value if their income is above the IRS’s gradual “phaseout” thresholds.

Let’s look at a couple of examples of how the same family would calculate their credit amount in two different income situations.

Scenario 1:

Debra is a single parent with three kids ages 4, 9 and 13. She has an adjusted gross income (AGI) of $70,000 (less than the $112.5k phaseout threshold), meaning her children qualify for the full credit value available. Debra has been receiving advance monthly payments and is trying to calculate the credit amount she could receive when she files next year. Previously in 2020, she received a credit of $6,000 and she wants to know how different her credit will be this year.

Ready to do the math? Here’s one way Debra could calculate her estimated credit amount:

  1. Determine the full potential credit value for each of her dependents.

$3,600 for 4-year-old + $3,000 for 9-year-old + $3,000 for 13-year-old = $9,600 (total CTC value)

  1. Calculate how much of her total CTC value she can expect to receive with her tax return.

Since Debra has already received half of her total CTC value as monthly payments, she needs to divide her total ($9,600) by 2 to calculate how much may be left over to claim when she files.

In this case, Debra can reasonably expect to receive a $4,800 credit when she files her 2021 tax return. Although this amount is lower than the $6,000 credit she received in 2020, the monthly payments she claimed from the IRS mean her total credit it still higher than last year, even though she is claiming a lower amount when she files.

Scenario 2:

Now let’s use the same family, but this time Debra’s AGI will be $120,000, which is above the IRS’s phaseout threshold of $112.5k for head-of-household filers. This time we will calculate her projected CTC tax refund value by looking at the monthly payments she received.

  1. Determine her monthly CTC payment.

Debra has been collecting from the IRS each month based on her income.

  1. Calculate the estimated CTC credit she can expect to receive with her tax return.

Debra has received six monthly payments totaling half of her estimated CTC value. To easily estimate the remaining CTC value she can expect to receive with her tax return, she simply needs to multiply her monthly payment by 6.

$500 x 6 = $3,000 (estimated remaining CTC value Debra will receive when she files)

Will I have to pay back any portion of my Child Tax Credit?

Unlike stimulus checks, some tax filers may be responsible for paying back some of their monthly CTC payments if they were overpaid by the IRS.

It’s important to note that the IRS determines how much your monthly credit should be based on how you filed last year’s taxes (or your 2019 return if you didn’t file in 2020). If you experienced any of the following changes or circumstances from 2020 to 2021, it may impact your tax refund:

Scenario 1: Your income increased dramatically in 2021.

Let’s say Michael has a spouse and two kids. He suffered a job loss last year and was out of work for the majority of 2020, but Michael landed a new job this February and has been working full-time ever since.

When Michael and his spouse filed taxes last year, their reported income was much lower than their projected income for the 2021 tax year. But because the IRS is basing its monthly Child Tax Credit payments on their 2020 income, Michael is receiving an overpayment from the IRS when adjusted for his current income.

If you are in a similar situation and expect your adjusted gross income to be drastically higher than it was last year, you may be receiving bigger CTC payments than you qualify for based on your new income. In this case, you could end up paying a portion of that credit back next year when you file.

Scenario 2: You are divorced and take turns claiming the Child Tax Credit.

Here’s another common scenario to consider: Diane and Robert are divorced and share joint custody of their child. They agreed to alternate which parent claims the Child Tax Credit each year — Diane claims the CTC on even years and Robert claims the credit on odd years. This means Diane last claimed their qualifying child on her 2020 tax return. The IRS doesn’t know about their alternating agreement, so Diane has been receiving the advance CTC payments for 2021.

When Robert goes to file his federal taxes and claims the credit on his tax return, he will be entitled to the full Child Tax Credit he qualifies for based on his income, and he will receive his payment in one lump sum. Meanwhile, Diane may be responsible for repaying the payments she received from the IRS.

What happens if I was overpaid by the IRS, but I can’t afford to repay my balance due?

The IRS has provided low-income families with a safe harbor when it comes to repaying any excess CTC payments received in 2021. If your AGI is at or below the following thresholds, you will not be responsible for repayment:

  • $60,000 or less for married couples filing a joint return or qualifying widows or widowers
  • $50,000 or less for heads of household
  • $40,000 for single filers or those who are married and filing a separate return

Once your AGI exceeds the above limits, the repayment protection amounts are phased out much like the increased value of this year’s Child Tax Credit.

If your income is too high to qualify for safe harbor repayment protection and you are still unable to pay your full tax balance, you aren’t out of options. The IRS offers a variety of different repayment options for American families who cannot afford to pay their full balance out of pocket.

Most American taxpayers won’t be blindsided by any big changes to their tax refunds next year, but as we’ve learned, there are some special circumstances to keep in mind. It’s always a good idea to crunch the numbers ahead of time so you have a sense of what to expect and time to prepare accordingly.