Why should some families opt out of the advance 2021 Child Tax Credit payments?

Anyone who filed a tax return in the last two years or has used the IRS Non-Filer tool will be automatically signed up to receive monthly payments from the tax authority. The payments are part of the 2021 Child Tax Credit and will begin 15 July and go through December.

However, there may be reasons to opt out of the advance payments and wait to receive a lump sum payment in 2022 through a tax refund. It’s currently too late to stop the July payment but there is still time to consider your options.

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2021 Child Tax Credit payments are not Economic Impact Payments

The system will work similar to the Economic Impact Payments, better known as stimulus checks, with the amount that families receive based on the most recent information the IRS has on file through a tax return or the Non-Filer tool which has been relaunched. There is a catch though, unlike the stimulus checks, any overpayments on the credit would come out of next year’s tax refund or even have to be repaid out of pocket.

Some families with this in mind may want to consider holding off receiving the credit until they file their 2021 tax return next year.

The advance payments are designed to provide parents with financial stability

The changes to the Child Tax Credit that were included in the American Rescue Plan will only apply to the 2021 fiscal year. It’s calculated that the payments will cut the childhood poverty rate nearly in half in 2021, providing families with a stable income.

The benefits of which will boost the opportunities for those children and in turn the economy as a whole. Democrats in Congress and the White House are planning to extend the tax credit expansion, but for how long has not been determined.

The payments will go to roughly 88 percent of households around the US, which means a lot of families that already have financial stability may not need the money right away. These families may consider opting out and waiting for a lump sum payment on the credit through a tax refund in 2022.

Why you might have to return the advance payments

The IRS determined eligibility for the advance payments based on 2020 tax returns, and when that wasn’t available 2019 tax returns, or information provided to the IRS by individuals on the Non-Filer online tool last year in order to claim their first stimulus check. Given that the information in some cases could be two years old, an individual’s circumstances may have changed such that an individual could be overpaid.

The IRS says that “if you expect the amount of tax you owe to be greater than your expected refund when you file your 2021 tax return,” you may want to opt out.

If you expect that your income will be higher in 2021 raising you above certain thresholds or you may owe taxes in 2022, you may want to consider opting out of the advance payments. Although the American Rescue Plan, which included the redesign of the Child Tax Credit for the 2021 fiscal year, created a “safe harbor” clause for lower- and moderate-income taxpayers, above a threshold, taxpayers would need to repay any overpayments they received.

Households with adjusted gross income at or below $40,000 on a single return, $50,000 on a head-of-household return, and $60,000 on a joint return won't have to repay any overpayments on the Child Tax Credit that they receive. However, those households making at or above $80,000, $100,000, and $120,000, respectively, will need to repay the entire amount of overpayment. For households with earnings in between these thresholds, they will need to repay a portion of any overpayments received.

Deadline to opt out of advance Child Tax Credit payments

The first deadline to unenroll from the advance payments has passed, so if you qualified keep a look out for the first payment arriving sometime after 15 July. Parents that want to opt out of payments “must do so three days before the first Thursday of next month by 11:59 pm Eastern Time.”

It will take about seven days for the IRS to process the request which individuals can check on the online portal. If you unenroll, there is currently no way to reenroll, but the IRS says that option will be available in late September this year.

For married couples filing jointly, both spouses need to opt out if they wish not to receive the advance payments. Otherwise, if just one unenrolls, the other spouse will receive half of the monthly payment that the couple has been determined to qualify for.

2021 Child Tax Credit Deadlines

How much will families receive per child?

Eligible families can receive up to $3,000 per child between the ages of 6 and 17 at the end of 2021. Each child under age 6 at the end of 2021 could qualify for up to $3,600. The credit is fully refundable, so if a family owes less than the amount of the credit, they will receive the excess as a tax refund.

Under the American Rescue Plan, taxpayers can still claim a nonrefundable credit of up to $500 toward the child tax credit for 18-year-old dependents and dependents between the age of 19 and 24 who are attending college full-time. There won’t be an advanced payment on this credit.

Who is eligible to receive the enhanced Child Tax Credit?

Under the new legislation, individuals will qualify for the full value of the Child Tax Credit so long as their annual earnings are below $75,000; or a joint income of up to $150,000 for married couples, widows, and widowers and $112,500 for heads of household. If household earnings surpass these limits, a reduced credit will be distributed. For every additional $1000 in income, the credit's value will be gradually phased out $50.

The IRS will determine eligibility based on 2020 tax returns or 2019 returns if a taxpayer’s 2020 tax return hasn’t been filed and processed yet. To be eligible, a taxpayer must have their main home in the US for more than half the year and care for the dependent for at least half of the calendar year. The IRS urges taxpayers with children to file a 2020 tax return as soon as possible, if they haven’t already, to get the correct amount from the tax credit. This includes those with no income who are eligible to receive the credit but are not normally required to file taxes. The agency also recommends using direct deposit to receive their refund and the advance payments faster.