Families will begin to receive the advance monthly Child Tax Credit (CTC) payments next month, but some parents may want to opt out.
Those who owe money to the Internal Revenue Service, saw their incomes increase significantly this year, or recently filed for divorce may want to consider unenrolling from the monthly payments, according to experts.
“Unlike the economic impact payments that were distributed last year, the child tax credit payments have to be paid back if too much was given,” Dennis Linden, a certified public accountant and director for the Northeast Ohio region of CBIZ MHM, told Yahoo Money. “It can be a very unpleasant wakening in April of 2022 when the 2021 tax return is filed.”
The $1.9 trillion American Rescue plan passed in March includes a one-year expansion of the CTC that increases the credit amount and allows it to be distributed in periodic payments in advance. Families can now use "The Child Tax Credit Update Portal" to unenroll from the monthly payments and instead receive the full credit after they file their 2021 tax return.
‘They may owe tax next year’
Households eligible for the CTC will receive half of their 2021 total credit in advance payments over the next six months beginning July 15 and ending in December. But if you typically owe taxes to Uncle Sam and use the CTC to offset what you owe, getting half of your 2021 credit as advance payments may mean a bigger tax bill in April 2022.
“The child tax credit — up to now — typically is used to reduce a taxpayer's tax liability at the end of the year,” David Flamer, CPA and president of David R. Flamer of An Accountancy Corporation, told Yahoo Money. “They may forget how the credit usually pays in part the tax related from their work, and they may owe tax next year.”
For 2021, the amount parents can claim is also higher, so families would likely be getting a bigger credit for the tax year. The maximum taxpayers can claim for the credit in 2021 is $3,600 for children under 6 and $3,000 for children between 6 and 17. Previously, the maximum tax credit was $2,000 per child under 17.
‘If their income rises over those thresholds’
If your income this year ends up exceeding the income eligibility thresholds for the CTC — maybe you get a new job or a big promotion — you may want to unenroll. Selling property in 2021 and other income gains can also change your eligibility for the credit.
A single filer with children under 17 making up to $75,000 will receive the full payment for each child, while those earning up to $90,000 will get a reduced amount. Joint filers with children who make up to $150,000 will get the full credit, while those earning up to $170,000 will receive a smaller amount.
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Single filers making over those thresholds but up to $200,000 and joint filers making up to $400,000 will be eligible for the old credit, which is $2,000 per child under 17.
The amount of the credit will be determined by their 2020 tax return. If that return is not available, the IRS will use their 2019 return.
“If their income rises over those thresholds, they would not be able to claim the credit,” Flamer said. “They would have to pay back the amount of the credit that was paid in advance.”
‘Look at those dependency requirements’
Divorced parents need to be careful with the advance payments and potentially consider opting out of the program. The advance payment goes to the parent who claimed the child on their 2020 or 2019 return. If the situation has changed, that parent may owe money to the IRS.
“You have to be able to claim your child as a dependent,” Lisa Greene-Lewis, TurboTax CPA and tax expert, told Yahoo Money. “You have to provide over half of their support, and they need to live with you at least half the year, so you just have to look at those dependency requirements as well.”
If your main home was outside the U.S. for more than half of 2021, you may also have to repay the money you received in advance payments.
One reason to not opt out
You may be tempted to unenroll from the payments if you’re worried the IRS may pay you more than you’re entitled to. But that’s not necessarily the case.
You may not need to repay the money if you make below $40,000 as a single filer or $60,000 as joint filers, according to a safe-harbor rule included in the American Rescue Plan. But if your income exceeds those thresholds and the IRS sent you more than it should, you may need to send a check next April to the federal government.