Lower-income taxpayers are getting some very good deals. If your modified adjusted gross income (AGI) does not exceed $40,000 for singles, $50,000 for the head of the household, or $60,000 for couples filing jointly, and you have been a resident in the U.S for over half of 2021, you will not have to return any overpayment amount.
That said, if you are a parent with a higher income, quite the opposite will happen. If your modified adjusted gross income (AGI) is $80,000 for single filers, $100,000 for the head of the household filers, or $120,000 for a couple filing jointly, you will have to pay back the entire overpayment!
This is also very confusing for those taxpayers who are stuck in the middle. A portion or part of your over-payment might be overlooked if your modified AGI for 2021 is between $40,000 and $80,000 as single filers, $50,000 and $100,000 as head of the household, or $60,000 and $120,000 as a couple filing jointly. To find out where you stand as far as the payment being wiped out, you will have to calculate what the IRS refers to as your “repayment protection amount”. It’s equal to $2,000 multiplied by:
How many children the IRS used to calculate your monthly child tax credit payment, minus the number of children used to calculate your total credit amount on your 2021 tax return.
If there is no difference between the number of children applied to calculate the 2 amounts then there is no overpayment reduction and the full amount will have to be repaid. If you have a positive repayment protection amount, it will slowly phase out as your modified AGI increases within the above-mentioned ranges.
The rate is based on how much your modified AGI exceeds the lower limit of the income range. Since your final repayment protection amount is calculated, it will be subtracted from your overpayment so you will know how much you will have to repay. Keep in mind, your overpayment cannot be reduced below zero.
This, again, can be confusing. As an example, if Mr. X is single and has claimed a child tax credit for 2 children on his 2020 tax return and they are between 2 and 4 at the end of 2021, the IRS will send him $3,600 in monthly payments in 2021. However, he cannot claim the child tax credit on his 2021 return if his ex-wife is claiming the 2 children as dependents on her return. His 2021 child tax credit is $0 so the entire $3,600 he received from IRS is considered an overpayment. His initial repayment protection is $4,000 for each child at $2,000. Therefore, if Mr. X filed his 2021 return with a modified AGI of $60,000, his modified AGI exceeded the lower limit of the appropriate income range; $40,000 by 50% – $60,000 – $40,000 / $80,000 – $40,000 = 0.5. As a result, his $4,000 repayment protection amount will be reduced by 50% to $2,000 and he only has to repay $1,600 of the $3,600 over-payment ($3,600 minus $2,000 equaling $1,600.
