The second installment of the child tax credit will hit the bank accounts of eligible recipients in less than two weeks. Still, people have a lot of questions related to the payment. Similar to coronavirus stimulus checks, one of the most asked questions is how the child tax credit (CTC) will affect the tax bill next year.[soros]
Child Tax Credit Isn’t Taxable
Congress approved the expanded child tax credit in March this year. Under the expanded CTC, parents would get half the amount of the credit in six monthly installments from July through December, and the other half, they would get when they file their taxes next year. Parents with kids under age 6 can get up to $300 per month, while for kids aged 6 to 17, parents could qualify for up to $250 a month.
Prior to this child tax credit, parents used to get the full credit at the time of filing taxes. So, the monthly payment that the parents are getting represents an advance credit against the tax return that they would file next year.
Talking about how the CTC payment affects your taxes, the very first thing you need to know is that these payments are not taxable. Since these payments are not income, you don’t need to report them as income when you file taxes next year.
“Advance Child Tax Credit payments are advance payments of your tax year 2021 Child Tax Credit,” the IRS says.
So now you know that the CTC payments aren’t taxable, but still, these payments may raise your tax bill or lower your refund amount next year.
As said above, you get two options with this year’s child tax credit. You can either receive half the payment in six monthly installments and the rest when you file taxes next year, or you can choose to get the full credit payment when you file taxes next year.
If you go for the second option, then you won’t have to return any money back to the IRS. This is because the agency will calculate the amount on the basis of your tax return next year.
However, if you decide on monthly payments, then the IRS will use your 2020 tax return to estimate your likely payment. This means, after your 2021 tax return next year, the agency will recalculate your payment to determine whether you were overpaid or underpaid through the monthly installments.
If you were overpaid, the IRS will reduce the extra amount from the payment you are entitled to next year. And, if you were underpaid, the agency will add the payment to your due credit amount next year.
However, even if you were overpaid, you may not have to return any money back (or return only a part amount) if you qualify for repayment protection. To know more about repayment protection, visit this link.