In July, many parents started receiving the first of six advance monthly payments from the child tax credit payment program. The American Rescue Plan Act of 2021 expanded the child tax credit to more families and increased the amount to help families ride out the pandemic. The advance payments allow parents to take advantage of the credit now to help with household bills instead of waiting until they file their taxes, as they typically would.
But there are certain situations where skipping the advance payments might make more financial sense for your situation. Here’s why delaying the credit could be the right move for your family.
YOU PREFER TO RECEIVE YOUR CREDIT ALL AT ONCE
With the advance payments, you’re receiving half of your child tax credit up front. That means you won’t receive the full credit when you file your taxes. If you typically owe money at tax time and rely on the child tax credit to help offset that, or you normally get a big refund and plan your finances around that, then you may want to stick with what you’re used to.
YOUR 2021 INCOME IS HIGHER THAN LAST YEAR
The IRS based your child tax credit payments on your 2020 income (or your 2019 income if your tax returns were delayed). So if your income is significantly higher in 2021, you run the risk of getting payments that you can no longer claim — which might mean you end up owing that credit back. If you’re not sure, you can use the Advance Child Tax Credit Eligibility Assistant on the IRS site to check.
If you’re self-employed, you likely pay the IRS estimated tax payments each quarter. But receiving the tax credit early could introduce some unknowns into your calculations. For example, if you paid $10,000 in estimated tax and also received $1,000 in child tax credits, it’s possible that the IRS might say you only paid $9,000 in estimated tax.
Failure to pay enough estimated tax means you could have to pay interest and penalties. So it’s a good idea to talk to a tax professional to make sure your estimates are correct if you want to keep receiving the monthly advance payments.
YOU DON’T ALWAYS CLAIM YOUR KIDS AS DEPENDENTS
If you’re divorced or married filing separately and don’t always claim your children as dependents on your tax returns (for example, maybe you and your spouse or ex-spouse take turns doing so) you could find yourself getting advance payments on a credit you weren’t even planning to claim for 2021. If you claimed your children last year but won’t be claiming them this year, you may owe that money back at tax time.
YOUR FAMILY SITUATION WILL CHANGE IN 2021
If your family situation is going to change — maybe one or more of your dependents is turning 18 this year — it might change the amount you can qualify for. You can update your dependent information on the IRS’ child tax credit update portal before payments are sent to try to prevent potential overpayment (and a surprise tax bill).
HOW TO MAKE CHANGES OR OPT OUT
If you do want to opt out of the child tax credit payments, you will have to create an account and get your ID verified through the IRS portal. The process takes about 15 minutes and you will need your driver’s license or other valid form of ID; you will also need to use a device with camera capability for facial recognition. Or, if you have an existing ID.me account, you can use that to sign in.
To opt out of the four remaining payments, you must unenroll by at least three days before the first Thursday of the month. So the remaining dates for this year are:
- August 30 for the September payment
- October 4 for the October payment
- November 1 for the November payment
- November 29 for the December payment
Note that if you file taxes jointly, both you and your partner will be required to create your own individual accounts and opt out separately. If only one partner opts out, the other will continue to receive half of the monthly payment.