The expanded child tax credit payments are slated to begin July 15. But should you graciously accept the payments or try to opt out of the child tax credit (for now)?
The new tax credit is being partially prepaid to qualifying families with children based on their 2020 tax return. The remainder of the credit can be claimed when you file your 2021 taxes. In case you missed it, check out our last blog post on the child tax credit and what you can expect in the coming months.
However, many families are considering whether they’d like to go ahead and start collecting their payments in July or wait for a bigger lump sum during tax season.
Why Opt Out of the Child Tax Credit Payments?
To opt out or not to opt out? It’s a big question.
There is no single right answer for everyone, so we’re helping you weigh the pros and cons so you can make an informed decision.
Your Tax Situation Has Changed
The monthly payments starting in July is a prepayment. Your estimated eligibility for the child tax credit is based on your income listed on your 2020 tax return. However, the total amount you can claim will be based on your income listed on your 2021 tax return.
If your tax situation has changed (e.g., you made more money in 2021 than in 2020, etc.), then you might want to opt out of the child tax credit. This means that you may end up having to repay some of those payments to the IRS.
For example, let’s say you and your spouse jointly made $100,000 adjusted gross income in 2020 due to job loss or a slowdown in work. Now, let’s say your income for 2021 rebounded and you made $170,000 adjusted gross income. That’s well above the $150,000 threshold to receive the full child tax credit benefits.
If you believe you might make more money in 2021 than you did in 2020 to the point where it will affect the threshold for qualification, you might be better off opting out.
You Usually Owe Taxes
In 2020, the IRS issued more than 126 million refunds, which accounted for nearly three quarters of all tax filers. For about a quarter of filers, though, they had to pay more money to the IRS.
If you’re among this smaller group, you might want to consider opting out of the child tax credit. This dollar-for-dollar credit will reduce your income tax liability. If it reduces it all the way to zero, you will receive the difference in the form of a refund.
This means you don’t have to come up with as big of a lump sum when it’s time to pay your taxes. This can be a huge financial relief to families that usually owe hundreds or even thousands of dollars each tax season.
You Share Custody of Your Child
Unlike the stimulus checks, divorced parents who share equal custody of their children cannot both claim the child tax credit. Only one parent can claim the credit, even if the child spends roughly equal time with each parent.
To be eligible for the credit, the child must live with you for at least six months of the year. In a 365-day year, one parent will have the child for at least one day more than the other parent. That’s the parent who should receive the credit.
However, if you’re in a situation where parents share equal responsibility, you may consider splitting the money between each parent.
You Have Children that Border Qualification
Did your five-year old turn six this year? Or maybe your 17-year-old became an adult? The child tax credit benefits vary by age, and small changes like going from five to six or 17 to 18 can be easily overlooked by the IRS. They’re trying to roll out a huge payment system quickly, so small considerations might take some time to catch up.
Such oversights could mean paying benefits that your child is ineligible for. This will catch up to you when you file your next tax return, which means you could end up having to repay some of the benefits you earned.
Check to see if you have children on the borderline of qualification. If so, you might want to hold off on receiving monthly payments.
You Need to Make a Major Purchase Next Spring
Getting a lump sum during tax season is a great time to fund large purchases that are typically out of reach the rest of the year. If you defer the monthly payments, you will receive a lump payment for your child tax credit. You can use those funds to pay off debt, make a big purchase, or use them as a down payment for a car or house, for example.
Sure, you could earmark your monthly payments for these things, but it can be tempting to spend that extra cash on other things. Waiting to collect your tax credit all together can remove this temptation and ensure you have the funds to use how you really need to.
How to Opt Out of the Child Tax Credit Payments
If you think that opting out of the child tax credit payments is right for you, you can do so when the IRS launches its new portal. This portal is expected to go live before the first payments are issued on July 15.
In the meantime, now is a great time to do a financial wellness checkup. Explore our free online resources and start moving forward to your financial goals.