To paraphrase Ben Franklin, the only certainties in life are the passage of time and taxes. In that spirit, a new year means the approach of a new Tax Day. As much of a hassle as filing taxes can be, many Americans actually look forward to April 15, as tax filing means a tax refund for over three quarters of filers. Unfortunately, many Americans already planning how to spend their tax refunds may not get what they expect.
The American Rescue Plan Act, passed into law in March of last year, expanded the Child Tax Credit (CTC) from $2,000 per child to $3,000, with a $600 bonus for children under the age of 6. Parents were automatically enrolled in a program to receive half of this credit in advance as a monthly payment.
Back in July, the first advance payments of the expanded CTC began hitting Americans’ bank accounts. The idea was to help parents with steady aid rather than a lump sum at tax time. But it may mean a lower tax refund than those parents were expecting, and in some cases, being left with a substantial tax liability instead.
That’s because the advance tax credits were issued based on the information on taxpayers’ 2020 or 2019 tax returns. Taxpayers whose income or filing status changed in the intervening period may be receiving advanced payment of a child tax credit that they won’t actually qualify for come tax time this year — meaning thousands could be forced to pay it all back to Uncle Sam in April.
There are many reasons a taxpayer could have been eligible for the CTC in 2020 but not 2021. Income can fluctuate year-to-year in normal times, but many Americans were temporarily laid off during the 2020 lockdowns only to find employment later on, meaning that many taxpayers’ incomes were higher in 2021 than 2020. That higher income could push many taxpayers over the threshold for CTC eligibility for 2021, but they would still automatically be signed up for advance CTC payments.
And it’s not just income changes that could affect CTC eligibility from one year to the next. Many divorced parents alternate claiming their children as dependents — a divorcee that claimed their child in 2020 but not 2021 would be responsible for paying back the entirety of the CTC payments they received.
Unfortunately, those parents living paycheck to paycheck that automatic monthly payments were specifically meant to help are also the worst equipped to handle a surprisingly large tax liability instead of a refund come April. At a time when just over a third of Americans could pay for an unexpected $1,000 expense, incorrectly paid advance CTC payments could leave taxpayers with a tax liability of up to $1,800 per child.
And while taxpayers had the opportunity to opt out of advance CTC payments, doing so would have required substantial hassle and exposing oneself to potential privacy risks. By the time advance CTC payments started going out, just about 1 million filers opted out — compared to more than 59 million who did not. It’s safe to say that many of those 59 million will have to pay something back come Tax Day.
It’s not all doom and gloom with advance CTC payments — independent analyses estimate that they could have the effect of reducing child poverty by nearly half. But that won’t help parents set to be hit with an unpleasant surprise this Tax Day. Should extending advance CTC payments be a priority for Congress this coming year, it must learn from its mistakes to ensure that its anti-child poverty tool doesn’t put parents into debt to the IRS instead.