You could get a smaller tax refund if you received child tax credit payments in 2021

"As the name implies, these checks were actually advance payments of a credit taxpayers normally receive when they file a tax return," - Judson Meinhart, a certified financial planner based in Winston-Salem, N.C., said.

Since eligible taxpayers already received half the total child tax credit amount, they may receive a smaller tax refund — and in some cases, they may even owe money after filing taxes this year.

How child tax credit payments will impact 2021 tax filings

Under the American Rescue Plan, the child tax credit amount was temporarily raised in 2021 to $3,600 for each child ages 5 and under and $3,000 per qualifying child between 6 and 17 years old. However, some families already received half the credit in six monthly payments between July and December.

"Those who got the advanced credit in 2021 are not always aware of how it works," Maureen M. Demers, a Massachusetts-based CFP, said. "They may expect a refund in April and be surprised that the credit already happened."

Taxpayers who received the six monthly advance child tax credit payments will be eligible for the remaining half when they file their taxes, worth between $1,500 and $1,800 per child. In previous years, the child tax credit amount was $2,000 per child — as a result, some parents may even owe money this tax season.

There are several ways to pay off a tax bill, including IRS installment agreements and payment extensions. You may also consider using a debt consolidation loan to avoid becoming delinquent on your tax debt. This is a type of unsecured personal loan that you repay in monthly payments at a fixed interest rate.

What to do if you received monthly child tax credit payments

In addition to potentially getting a smaller refund, CTC recipients will need to consider how the advance monthly payments will impact their tax liability, Meinhart said. 

"Many parents rely on the child tax credit to reduce their tax liability on a dollar for dollar basis," he said. "Oftentimes this is the difference between receiving a tax refund or having to pay taxes in April."

In comparison to previous filing years when the CTC amount was $2,000, a family's tax liability may be higher this tax season by $200 or $500 per child if they already received half the child tax credit in monthly payments. To offset this, taxpayers may consider other ways to reduce their tax liability. Here are a few options:

• Child and dependent care credit. Taxpayers who paid for child care expenses while one or more spouse was working in 2021 may qualify for a tax credit worth up to $8,000 for one qualifying individual or $16,000 for two or more qualifying individuals.
• Student loan interest deduction. Although interest was paused on federal student loans throughout 2021, taxpayers may be eligible to deduct the interest they paid on their private student loans. This can reduce taxable income by up to $2,500, depending on income thresholds.
• Self-employed health insurance deduction. Self-employed parents may be able to reduce their taxable gross income by claiming the premiums paid on a health insurance policy, including policies for dependents under 27 years old. The amount of the credit varies based on income limits.

Besides these credits and deductions, parents may also consider contributing to a retirement account before the filing deadline to reduce their tax liability. 

"If they are eligible, taxpayers can make up to a $6,000 contribution to a traditional IRA that will count as an above the line deduction on their 2021 taxes," Meinhart said. "Taxpayers over the age of 50 can contribute an additional $1,000 as a catch-up contribution."