They were shocked! Instead of receiving a stimulus payment of $9,800, they received a tax bill for over $10k!

They were shocked! Instead of receiving a stimulus payment of $9,800, they received a tax bill for over $10k!

How did this happen?

This family with five children filed a 2021 tax return to apply for the third COVID stimulus payment (also known as the recovery rebate). It was $1,400 per person, so for 7 people it comes out to $9,800. A nice amount for this low income family.

However, they didn't realize that they had already received this payment as an advance payment in March 2021.

OK, so then they should get $0. Why did they owe any tax? Especially this crazy amount??

Turns out that they had also received a total of $7,500 for the Advance Enhanced Child Tax Credit payments of 2021.

They had received $1,250 monthly from 7/2021 - 12/2021. These payments were advance payments of 1/2 of the amount of the special enhanced 2021 child tax credit payments. The full amount per child was $3000 or $3600, depending on age.

This family lived outside the US, so they never actually qualified for these payments. But the IRS mistakenly issued these payments, due to them having listed a US mailing address on their 2019 tax return.

When they filed their 2021 tax return, they checked the box that they lived outside the US most of the year, as required.

They didn't realize that this would cause the IRS to calculate the $7,500 received in 2021 as tax due, since they were required to return it. They forgot to enter how much they received for the advance payments on the 2021 return, so they were oblivious that they would owe tax.

After adding penalties, the letter received in 8/2023 calculated a total of $10,176.90 due.

Thankfully, there is a solution for them:

They would file an amended 2021 return, without claiming any children as dependents. Since the law does not require claiming all possible dependents, this is allowed.

This caused the "safe harbor" or "repayment protection" of the 2021 enhanced child tax credit to take effect.

This safe harbor exempts low-income taxpayers from repaying advance child tax credit payments received in error, if there was a change in the amount of child dependents.

While the safe harbor never included a clause for all expats to be able to keep any payments received in error, this method can be used for those with low income as a workaround.

The final result in this case is $0 tax due, all penalties and interest removed.