Advance Child Tax Credit Surprise

Many taxpayers with qualifying children received Advance Child Tax Credit (CTC) payments from July to December 2021. Advance payments of the CTC were part of the $1.9 trillion American Rescue Plan. Eligible families received monthly payments of up to $300 per qualifying child to help them bridge the financial gap caused by the COVID-19 pandemic. Payments were processed by the IRS using taxpayer information they already had on file.

Advance CTC payments were just that; an advance payment of the tax credit that would ordinarily be received this tax filing season, when income tax returns are filed for 2021. However, many taxpayers who are used to getting a federal tax refund could be in for a surprise when they go to file their 2021 return. Their expected refund is a lot less than they are used to getting. The reason? They got part of their tax refund in the form of six-monthly checks or direct deposits during the last half of 2021.

The tax pro-community, including me, wasn’t against the idea of advancing CTC payments to help parents with their monthly expenses. Actually, it was a terrific idea. We were concerned about the communication – or lack thereof – about how the advance payments would reduce the credit amount reported on the taxpayer’s return. Lower federal tax refunds during filing season were not explained clearly enough for most impacted taxpayers to understand.

Failing to manage expectations for a lower federal refund has resulted in an abundance of Advance Child Tax Credit Surprises. For some people, a lower refund is merely an inconvenience or an annoyance. But for others, it could create financial hardship or personal debt. For now, it doesn’t look like the Advance CTC will be reenacted. If it is, the IRS has an option to decline the advance payments and determine the credit amount when filing a federal income tax return. More information about the Advance CTC is on the IRS website at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

They must be getting a lot of questions because the IRS also posted answers to Frequently Asked Questions about the filing of 2021 taxes this season with Advance CTC. Hopefully, your questions are addressed here https://www.irs.gov/credits-deductions/filing-season-2021-child-tax-credit-frequently-asked-questions.