Thanks to the advance payments of the Child Tax Credit, approximately 60 million children received $15 billion in July, according to the Department of Treasury and the IRS. While many of these families will benefit from the extra money deposited into their bank accounts, some families may want to opt-out and instead take the credit when they file their tax return next spring.
Why Consider Opting Out?
There are several reasons a taxpayer may want to opt-out or unenroll. For example, if the amount of tax owed when filing a 2021 tax return will be greater than the expected refund.
Because the payments you receive are an advance of the Child Tax Credit that a taxpayer would normally qualify for when filing their taxes, every dollar received in advance will reduce the amount of Child Tax Credit a taxpayer is able to claim on their 2021 tax return. By accepting advance child tax credit payments, the refund amount may be reduced, or the amount of tax owed may increase. By unenrolling and claiming the entire credit when filing a 2021 tax return, a taxpayer may avoid owing tax to the IRS – thereby avoiding a “tax surprise.”
If your tax situation has changed and you receive more money than you are entitled to, you will generally need to pay any excess back to the IRS. However, if your income is below certain threshold amounts, then IRS repayment protection applies. These amounts are:
- $60,000 if you are married and filing a joint return or if filing as a qualifying widow or widower;
- $50,000 if you are filing as head of household; and
- $40,000 if you are a single filer or are married and filing a separate return.
Some families may prefer to receive a lump sum payment (i.e., tax refund) instead of smaller payments. This is especially true if families use the refund to make a large purchase such as a car or home appliance.
Complex family situations such as divorced or separated parents who share custody and claim dependents on their tax returns in alternate years, for instance, also make unenrolling an attractive option – simply to avoid an even more complicated tax filing situation.
Self-employed individuals, whose income fluctuates, may also want to opt-out. Typically, estimated taxes are paid based on a prior year’s income and may differ from the current year’s income. Because the advance payment of the Child Tax Credit offsets the amount of tax owed, it may inadvertently result in an estimated tax penalty.
Higher net worth families with complicated tax returns that include not only wages but income from capital gains or rental properties are another group that might consider unenrolling. Quite often, they have tax planning strategies to reduce their tax liability, and any extra income could complicate their tax situation.
How to Unenroll
The Child Tax Credit Update Portal (CTC UP) allows taxpayers to unenroll from receiving Advance Child Tax Credit payments. To stop advance payments, a taxpayer must unenroll three days before the first Thursday of next month by 11:59 p.m. Eastern Time. There is no need to unenroll each month. If that month’s deadline is missed, the next scheduled advance payment will be sent out. The unenrollment process may take several days, and taxpayers should check back after unenrolling to make sure the request was processed successfully.
Here to Help
Taxes are complicated, and pandemic-related tax legislation has made it even more so. If you need help figuring out whether your tax situation merits opting out of the monthly advanced payments of the Child Tax Credit, don’t hesitate to contact us.