Why Opt Out of Advance Child Tax Credits?
The first payment of six monthly advance Child Tax Credit payments started Thursday, July 15, and will continue each month through the end of 2021 while the remainder of your total 2021 Child Tax Credit (CTC) will be applied to your 2021 tax filing. The first CTC payment was distributed Thursday, but you may not see the direct deposit for at least three business days.
Some families welcome those payments right now as they recover from lock down, but others may want to consider opting out or unenrolling of the advance payments because they would prefer to have a bigger refund next year, or they could potentially owe the IRS on their 2021 taxes.
Millions of taxpayers have had their 2020 taxes significantly delayed largely because they did not have records to accurately report their stimulus payments. Inaccurate information on their returns triggered a manual review by the IRS, delaying processing.
When you receive your CTC advance payments, keep records of deposit dates and amounts to include in your tax documents. Because half of the Child Tax Credit is in the form of advance payments and half will be claimed on your 2021 tax return, accurate information is critical to avoid delays in processing.
Also, in January 2022 the IRS will be sending a letter summarizing the amount of advance CTC payments you received in 2021. Keep that letter with your tax documents. This is additional support to file accurately.
Opt Out For A Bigger Refund Next Year
The enhanced Child Tax Credit payments are an advance of what you would normally receive or be credited on your 2021 taxes. Whatever payment amounts you receive from July through December decreases the amount of Child Tax Credit you can claim when you file for 2021.
If you don’t need the money now, you may want to opt out of the advance payments and wait to receive the full credit on your 2021 taxes.
Opt Out If You Will Earn More Income
The enhanced Child Tax Credits are based on your 2020 taxes, so if you expect to have a significantly higher income for 2021 you may want to opt out.
For example, if you or a spouse were unemployed in 2020, but you are both employed in 2021, you may owe more taxes when you file your 2021 return.
Also, with a higher income, it’s possible you will qualify for a reduced advance Child Tax Credit.
The $3,000 annual benefit per child 6 to 17 years old will be $250 each month.
For children younger than six, the family will receive $3,600 annually, distributed monthly at $300.
The reductions phase out in two steps:
Phase 1 Reduction: The first reduction of your Child Tax Credit is $50 for each $1,000 your modified AGI exceeds the income threshold.
- $150,000 if married and filing a joint return or if filing as a qualifying widow or widower;
- $112,500 if filing as head of household; or
- $75,000 if you are a single filer or are married and filing a separate return.
Phase 2 Reduction: The second reduction in the credit you qualify for is if your AGI reaches these thresholds:
- $400,000 if married and filing a joint return; or
- $200,000 for all other filing statuses.
If you expect an increase in income on your 2021 taxes that can reduce your CTC, then you may want to opt out of the advance payments.
Unenroll In Advance Child Tax Credits
Opting out of the advance payments is a one-time unenrollment; you don’t need to unenroll every month.
If you opt out but you miss the unenrollment deadline, you will receive any payments you qualify for (based on your 2020 taxes), and your unenrollment request will be processed before the next payment date.
Married Filing Jointly Unenrollment
For married filing jointly, both you and your spouse will need to unenroll. Opting out is for the individual only.
If only one of you unenrolls, the other will receive half of the joint payment.
Tax Planning and Preparation
For help with your income tax planning and preparation, give us a call.