Yes, it is possible that your receipt of advance Child Tax Credit payments could cause you to owe the IRS money or result in a smaller tax refund than you expected. This situation can arise in two primary ways:
- Excess Advance Payments: If the total amount of advance Child Tax Credit payments you received during the year exceeds the amount of Child Tax Credit you are eligible to claim on your tax return, you may need to repay the excess amount. This is because the advance payments are based on an estimate of your eligibility, and if your actual eligibility is lower, the excess must be reconciled. According to Subsection 24(j)(2)(A), if the aggregate amount of payments under section 7527A to the taxpayer during the taxable year exceeds the amount of the credit allowed, the tax imposed for that year shall be increased by the amount of such excess.
- Reduction in Refund: If the advance payments you received are greater than the increase in your Child Tax Credit for the year, you may end up with a smaller refund. This is because the advance payments reduce the amount of Child Tax Credit you can claim on your tax return. For example, if you received advance payments for children who no longer qualify, those payments will be added to your tax liability unless you qualify for repayment protection.
Additionally, the IRS FAQ explains that reconciling your advance Child Tax Credit payments involves comparing the total amount of advance payments received with the amount of Child Tax Credit you can properly claim. If the advance payments exceed the allowable credit, you may need to repay the excess, which could reduce your refund or increase your tax liability.
Therefore, receiving advance Child Tax Credit payments can indeed lead to owing money to the IRS or receiving a smaller refund if the advance payments were overestimated or if your eligibility changes.
Sources:
§ 24. Child tax credit
