Millions of taxpayers have been receiving multiple government payments in the name of COVID relief, some with more yet to come.  Whether you smile or frown when these payments hit your bank account, there are some important details you need to know.

It all started with the CARES Act in March of 2020, which directed IRS to issue $1,200 payments to adult taxpayers, plus another $500 per dependent under age 17.  These were officially known as Economic Impact Payments (EIPs), but also commonly referred to as recovery rebates or stimulus checks.

These were expanded in December with another round of $600 per person including dependents, again under age 17 (EIP-2).  Then in March of 2021, the American Rescue Plan Act (ARPA) created a third round of payments (EIP-3) of $1,400 per person, this time including dependents of any age.

The first two rounds were actually an estimated advance payment of a 2020 tax year credit, and the third is for 2021.  When you file each year’s return, you reconcile what you got vs. what you’re eligible for based on the final return, and possibly receive an additional credit; if you’re entitled to less, you don’t have to pay it back.  So, while these payments aren’t taxable in any way, you do need to know how much you received in order to determine an additional credit, if eligible.

But wait, there’s more!

ARPA also significantly expanded the child tax credit.  For 2021 only, instead of the previous $2,000 per dependent under age 17, the credit can be as much as $3,000 per dependent under age 18… $3,600 if they’re under age 6.  And this time, the credit is fully refundable, rather than only offsetting your tax liability as before.  For 2022, the credit will revert to 2020 levels and rules.

Rather than wait until 2021 tax returns are filed for taxpayers to benefit from these changes, ARPA directed IRS to begin making advance payments to eligible taxpayers of half the projected credit, divided into 6 monthly installments from July through December.  These advance payments will initially be based on either your 2019 or 2020 tax return, depending on when you file.  As with the EIPs, taxpayers will reconcile whatever advance payments they receive on their 2021 tax returns, claiming any remaining credit on the return, so it’s important to keep track of how much you receive.

Unlike the EIPs however, you might need to pay back excess payments you receive.  When you file your 2021 return, if your actual child credit is lower than the IRS projected and you received too much, you may need to repay the difference if your adjusted gross income is over $60,000 on a joint return, or $40,000 on a single/separate return.  Remember that the advance payments will only be half of what the IRS is projecting, so there’s already some safety margin built in.  In addition, “repayment” is a bit of a misnomer, as any excess will be treated as taxable income, not a literal payment due back.  Increasing your income will of course increase your tax liability, but based on your tax bracket, not a dollar for dollar pay back.  On the other hand, if the excess increases your adjusted gross income, that could have negative “trickle down” effects on other calculations in your federal return, and possibly increase your state income tax as well.

Also unlike the EIPs, you have the opportunity to adjust how much your advance payments will be, up or down.  You may disenroll from the payments entirely, leaving your full credit in place to claim on your 2021 return.  There could be some advantages to that.  For example, if you are paying estimated tax payments, any reduction in your credit on the return will increase your tax and might require an adjustment to your quarterly payments, or possibly expose you to underpayment penalties.  Or maybe you know something the IRS doesn’t, where you won’t be eligible for any credit for 2021 and want to avoid the negative implications of an excess payment.

You can also use a new adjustment tool on the IRS website (available soon) to increase or decrease your projected child credit.  For example, perhaps you expect another child by the end of 2021, your marital status changes, or your 2021 income changes making you eligible for either a larger or smaller credit than predicted.

In any case, it’s important to keep track of the monthly payments you receive.  You’ll need that information to reconcile your credit on the 2021 return.  Especially pay close attention if the monthly payments change, either because they were initially based on your 2019 return and changed when you filed 2020, or because you requested an adjustment on the IRS website.

We’ve just hit the highlights of these payments, more information is available on the IRS website, www.irs.gov.  For the child credit changes and advance payments specifically, https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021