This tax season, taxpayers caring for children are navigating a fundamental change to the Child Tax Credit (CTC) when filing their returns. For some, this could mean a surprise change in the size of their reimbursement, or other potential complications, underscoring the inconveniences of administering family programs in the already remarkably complex federal tax system.
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Despite many unanswered questions about how advance payments work, the Treasury Department and the Internal Revenue Service (IRS) began sending monthly payments of up to $300 per child in July 2021. July through December Last year, they disbursed more than $30 million in monthly payments for a total of more than $90 billion paid out before tax season, based on IRS eligibility estimates using the recently filed tax returns or information about Economic Impact Payments (stimulus check).
Families used the advance payments primarily for expenses such as childcare costs, school supplies, food, rent and bills or to pay off debt. Now they have to reconcile what the IRS says they received in advance, which is on letter 6419, to their Form 1040.
Although the CTC expansion was structured so as not to raise taxes for any household, one dollar of credit received up front translates to one dollar less received at filing time. For families unaware of the trade-off, it could mean a surprise when they see their full refund this year.
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Take the example of a married couple with a 10-year-old child who normally received their CTC of $2,000 when they filed their taxes. They would have received $1,500 of their $3,000 upfront. So they could potentially see their refund go down by $500 even though their total benefit has increased to $3,000 because they have $1,500 left instead of their normal $2,000 at tax time.
Other families might see their refund amount go the other way. In particular, low-income families who previously did not qualify for any CTCs or who received only limited credit may receive a larger refund than usual.
Unforeseen changes in refunds only scratch the surface of potential complications.
If the monthly advance payments a taxpayer received were more than the amount to which they were entitled, they may have to repay the excess when filing their taxes. Joint filers with modified adjusted gross income (MAGI) less than $60,000, household heads filing less than $50,000, and single filers less than $40,000 have refund protection, but gradually disappears for higher income households.
Families with complex living situations may have experienced difficulties with advance payments, which could translate into difficulty filing their taxes.
For example, some parents who share custody of a child have agreed to receive the child tax credit every two years. IRS eligibility estimates, however, mean the payments could have gone to the same parent who claimed the child the previous year instead of going to the other parent. If a parent has not opted out of payments, they may be liable for refunds if they are not eligible for full coverage.
The complications highlight the downside of administering a child benefit through the IRS, an agency primarily responsible for collecting revenue and not administering social programs. Credit expansion has now expired, but lawmakers are debating how to restore it in the future. Weighing the trade-offs of using the tax code to pay child benefits should be a key part of the debate – taxpayers deserve a simpler system.
Erica York is an economist at the Tax Foundation, a nonpartisan think tank in Washington, D.C. You can follow her on Twitter at @Ericadyork.