Initially, you may feel excited to see your child tax credit check come in the mail or get directly deposited into your account. While many people have fallen on hard times over the past few years, the additional funds help some to make ends meet or may help fund holiday festivities.
What many people do not realize, however, is there are certain rules surrounding the tax credit payments. These rules and regulations may come back to haunt some next year when the IRS requires you to pay some of the money back.
Where does the money come from?
Over the course of 2020, many Americans received stimulus checks from the federal government and they were not expected to repay the government at a later date. The child tax credit is not a stimulus payment. The IRS takes the money from your refund for the 2021 tax year. Essentially, the IRS is paying out your 2021 tax refund in several payments deposited once a month from July to December of 2021.
How can this become an issue?
While the IRS is banking on the idea that you will receive a tax refund for the 2021 tax year, you may not actually have a refund coming. In this case, the IRS will expect you to repay any child tax credit payments you received, according to CNBC Make It, taxpayers are also expected to return money if the IRS overpaid a household.
You may encounter certain experiences throughout the year that affect your gross income and tax refunds. For example, if you or your spouse suddenly return to work after being unemployed for much of 2020 or you get promoted to a higher-paying position, it could place you in a higher tax bracket. This could also affect people whose income increased because of property sales.
It is important that you take a careful look at last year’s tax return and consider whether any circumstances may change your expected refund for next year. Next, think about putting away your child tax refund checks and avoiding spending them until you are sure you do not owe any money on your 2021 taxes. This may help you avoid any financial dilemmas that may occur.