Some households may have to repay expanded Child Tax Credit — 4 key differences with stimulus checks

It’s the start of advance payments under the expanded Child Tax Credit (CTC).

Eligible families will get $250 for every child age 6 through 17, between July and December. Families will get $300 per child for every kid under age 6. The first payments will go out July 15 and the IRS will continue to issue payments in middle of each month through the end of 2021.

The credit has been paying families in lump sums at tax time for more than two decades. But earlier this year, Congress gave a one-time boost to the amount, broadened eligibility and enabled payments in advance monthly installments.

Federal lawmakers made these changes when passing the $1.9 trillion American Rescue Plan, a bill that also authorized $1,400 economic impact payments.

This year, the credit increases from $2,000 to $3,600 for children under age 6 and $3,000 for kids between age 6 and 17. Half the sum can be advanced and distributed monthly.

Similarities between the two

There are also many similarities between CTC money and stimulus checks. In both cases, there are no spending restrictions. Furthermore, households will receive the money if they fall under a certain income limit. The IRS determines stimulus checks and CTC payouts using tax-return data.

Those income limits for full payment are the same for stimulus-check money and expanded CTC payouts. The thresholds are $75,000 a year for individuals, $150,000 a year for married couples filing jointly, and $112,500 a year for people like single parents who are filing as Head of Household.

In both cases, the IRS is looking at whichever recent tax return is available in a two-year window. For the third round of stimulus checks and the CTC, the tax collection agency is looking at 2020 returns, or 2019 returns if this year’s return isn’t yet available.

Neither stimulus checks nor CTC money will affect a person’s eligibility for benefits, according to IRS information.

Both cash infusions are not counted as taxable income. If the money did count as income, that could potentially create all sorts of tax headaches, like raising some people to higher tax brackets. (But keep reading for more information on one potential CTC tax headache to be ready for.)

But there are also important differences people need to remember now and at tax time, they add.

“I wouldn’t be surprised if some people get confused, thinking it’s a fourth round of stimulus checks,” said Alvin Carlos, financial planner and managing partner for District Capital Management, a financial adviser firm located in Washington D.C.

The payments — whether as direct deposits, paper checks or prepaid debit cards — will go to approximately 39 million households, which the Treasury Department says are 88% of the country’s families with children.

So here’s a primer on both the similarities and critical differences between CTC money and stimulus check.

Qualifying minor

The IRS cut stimulus checks for all eligible children in a household, but it also cut checks to people without qualifying dependents.

Without a minor living in the household, there will be no Child Tax Credit. But the person does not have to be your child, as long as he or she is a dependent.

The IRS said “qualifying child” is the taxpayer’s “son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them,” including grandchildren, nieces or nephews.

The child has to live in the household for more than a half of the year and be properly claimed as a dependent, the IRS said.

“It’s possible there are some people who haven’t been following the Child Tax Credit and won’t know what the money is,” added Lauren Saunders, associate director at the National Consumer Law Center.

One cause for concern: Only 55% of potentially eligible parents say they’ve read or heard at least something about the expanded CTC, according to a poll of more than 1,700 people conducted from early to mid-June by Data for Progress and commissioned by groups including the Economic Security Project.

That percentage is too low, said Adam Ruben, the Economic Security Project’s campaigns director. Advocates for the expanded tax credit need to keep working to spread the word so “when that money hits people’s bank accounts, or they get a check in mail, they know what this is for.”

Real-time eligibility

The IRS determined stimulus-check amounts based on one snapshot in time: a household’s tax return. A lot can happen in a year, but if a family had child after filing a tax return, the IRS didn’t have an immediate way to learn about the new dependent and quickly issue another payment.

(A so-called “plus-up payment” in the third round of stimulus checks enabled the IRS to send extra money based on 2020 tax return data after it sent a stimulus check using 2019 tax return data.)

Adjustments to the advance Child Tax Credit payments are going to have a more real-time feel. On Tuesday, the IRS unveiled its “Child Tax Credit Update Portal.” This is where users can actually opt out of payments and also give the IRS current information on the number of eligible kids in a house.

In the months to come, the IRS will expand the categories that can be updated. Later this month, users will be able to put in new bank-account information for the August payments. In August, users should be able to update their mailing address, the IRS said.

During future updates at some point in the summer and fall, people will be able to use the portal to update family status and income changes, the IRS said.

You may have to pay it back

Talk of the portal and opting out brings up another big difference between stimulus checks and advance CTC money. Households paid too much CTC money in advance may have to pay it back, something that doesn’t happen with stimulus check money.

The IRS is basing CTC payment amounts on 2019 and 2020 tax return data, but if someone in a household lands a better-paying job or a nice raise, that could push them out of income eligibility, Carlos explained.

If the IRS overpays, it will want the money back during the 2022 tax season. The IRS has said it will deduct the excess payment from refunds, but can work out installment plans for people who don’t have the funds to pay the balance due. (The IRS said it will waive repayment obligations in certain cases.)

This is one big reason why the IRS is giving people the chance to opt out of the advance payments.

Carlos said he plans on talking with several clients who might consider opting out of the CTC advances because they are just around the income-eligibility limits. A bump over could result in an unforeseen tax obligation, he said.

Debt garnishment

Beware of debt garnishment with CTC money. When the first round of stimulus checks rolled out under the CARES act, stories popped up on some debt collectors swiping the cash before families could use it.

Rules surrounding the second round of stimulus checks, for $600 apiece, barred garnishment from creditors with judgments, according to the National Consumer Law Center.

But the the organization said the third round of stimulus checks did not include protections against garnishment due to a bill passed in a Congressional maneuver called “budget reconciliation.”

The CTC advance payments also don’t have garnishment protections. “To the extent permitted by the laws of your state and local government, your advance Child Tax Credit payments may be subject to garnishment by your state, local government, and private creditors,” the IRS said.

Saunders noted that a handful of states, like California, have specified the imminent CTC payments cannot be seized for debts. But a federal law against CTC garnishment is a better solution, she said. The regularity of the payments will make it easier for debt collectors to time their requests to banks for the money, she said.

“We really need Congress to step in and protect these payments” Saunders added.