Eligible parents have already started receiving advance child tax credit (CTC) payments from the federal government. The American Rescue Plan Act passed earlier this year included a one-year expansion of CTC payments, which increases the available credit amount and provides advance monthly distribution. Eligible taxpayers received their first payments on July 15, 2021.
According to the IRS, about 39 million households covering 88% of children in the U.S. “are slated to begin receiving monthly payments without any further action required.”
Qualifying taxpayers will be automatically enrolled to receive these advance payments, but some taxpayers may want to opt out — or risk owing the money back when they file their taxes in 2022.
Here’s a look at how the CTC program is changing and a few reasons a taxpayer might consider opting out.
How have child tax credits changed?
The American Rescue Plan Act temporarily increased the maximum CTC — for 2021 only — to $3,600 for each qualifying child under age 6 and to $3,000 per child for children ages 6 to 17, provided their parents’ income is below a certain threshold.
Taxpayers will receive advance payments up to $300 monthly for each child under 6, and up to $250 monthly for each child 6 and older. The increased credit amount will be reduced or phased out for households with modified adjusted gross income above the following thresholds:
- $150,000 for married taxpayers filing jointly and qualifying widows and widowers
- $112,500 for heads of household
- $75,000 for other taxpayers
Under prior law, the maximum annual CTC for 2018 through 2025 was $2,000 per qualifying child but the income thresholds were higher and some of the qualification rules were different.
Important: If your income is too high to receive the increased advance CTC payments, you may still qualify to claim the $2,000 CTC on your tax return for 2021.
What is a qualifying child?
For 2021, a “qualifying child” with respect to a taxpayer is defined as one who is under age 18 and who the taxpayer can claim as a dependent. That means a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year. The child also must be a U.S. citizen or national or a U.S. resident.
If you recently got divorced or have a shared custody arrangement, the payment will go to the parent who claimed the child on their 2020 or 2019 returns.
How and when will advance payments be sent out?
Under the American Rescue Plan Act, the IRS established a program to make periodic advance payments for half of the IRS’s estimate of the eligible taxpayer’s 2021 CTCs, from July through December 2021. The payments began on July 15, 2021, and they will be made on the 15th of each month (unless the 15th falls on a weekend or holiday) for the remainder of 2021. Taxpayers who missed the deadline to opt out of the July or August payments still have the ability to opt out of the remaining monthly payments through the CTC update portal.
Parents will receive the monthly payments through direct deposit, paper check or debit card. If needed, you can update your bank information on the IRS website.
What are the reasons you may want to opt out of the payments?
There are a few reasons you may want to unenroll from the Child Tax Credit payments:
- You owe money to the IRS
- Your income significantly increased in 2021
- You recently filed for divorce or have a shared custody arrangement
- You would rather get the CTC in one lump sum for planned spending, rather than half of it in 6 smaller payments
If you receive too much in child tax credit payments, you will have to pay it back after filing your taxes in 2022. If you are below the income threshold and meet the qualification rules and have unenrolled from the advance monthly payments, you could still receive the full Child Tax Credit after filing your annual tax return. Opting out of the advance monthly payments only changes the timing of the payments, not the amount you are eligible to receive.
Visit the IRS Child Tax Credit Update Portal to see if you are enrolled for advance payments, to provide or update your bank information, or to opt out.
Important: For married couples, both taxpayer and spouse are required to opt-out.
Contact us today if you have questions about the Child Tax Credit payments.