Opting Out of the Advance Child Tax Credit Payments

Opting Out of the Advance Child Tax Credit Payments

The IRS started delivering monthly payments of the child tax credit for 2021 to taxpayers on July 15. The payments generally will continue to be made via direct deposits, paper checks or debit cards on the 15^th day of each month from July through December. A taxpayer, however, has the option to unenroll from receiving the advance payments.

There are several reasons why a taxpayer might want to opt out. For example, a taxpayer might be concerned about owing more taxes when they file their 2021 tax return because of changes in their circumstances. This could include having too much taxes withheld from their wages due to changes in the credit. A taxpayer may also simply prefer for planning purposes to receive the refundable credit in one payment next year when they file their tax return.

Enhanced Child Tax Credit for 2021

The advance payment is just one of several temporary changes made to the child tax credit for 2021. Generally, a taxpayer claims the credit as a lump sum when they file their return. Beginning in July, however, an eligible taxpayer automatically receives an advance of up to $300 per month for each qualifying child under age six, and $250 per month for each qualifying child between the ages of six and 18. 

An individual is eligible for the advance payments if he or she has a qualifying child for 2021 and a main home in the United States (the 50 states and the District of Columbia) for at least one-half of the year. The individual does not have to have any earned income to receive the advance payments. An eligible individual should have received a letter from the IRS in June estimating the amount of the payments.

Why Opt-Out from the Payments?

The payments are an advance of the child tax credit the taxpayer would normally receive. Every dollar a taxpayer receives in 2021 will reduce the amount of the child tax credit claimed on the taxpayer’s return filed in 2022. Thus, the payments will reduce any refund the taxpayer normally receives or could result in additional tax liability.

This is because the advanced payments are generally based on the taxpayer’s last processed return (2019 or 2020). A taxpayer’s situation, however, can change throughout the year and this could result in the total amount of advance payments received during 2021 exceeding the actual credit the taxpayer claims on their return.

For example, excess advance payments could result because:

• the taxpayer’s income increases in 2021 (the taxpayer receives a raise, finds a new job, or returns to work after being unemployed),
• the taxpayer’s child ceases to be a qualifying child during 2021 because he or she ages out of the $300 or $250 monthly payment,
• the taxpayer’s child ceases to be a qualifying child in 2021 because he or she changes homes during the year and resides with a different individual for more than half the year (for example, due to divorce or separation of the parents),
• the taxpayer’s main home changes and is outside the United States for more than half of 2021, or
• the taxpayer’s filing status changes during 2021.

A taxpayer whose circumstances changes in 2021 may use the IRS Child Tax Credit Update Portal (CTC UP) to update their information so they IRS can adjust their advance payments for the remainder of 2021. This could help reduce the potential that the taxpayer receives excess advance payments.

Form W-4 and Income Tax Withholding

A taxpayer may also have a higher tax liability in 2021 because not enough taxes are withheld from their wages due to the child tax credit. A taxpayer generally includes the amount of child tax credit they are eligible to claim in computing their withholding on Form W-4.

For 2021, the maximum credit is increased from $2,000 to $3,600 for a qualifying child under age six and $3,000 for a qualifying child between ages six and 17. Form W-4, however, has not been adjusted for this change and most taxpayers most likely have not asked their employer to adjust their withholding from wages.

The result is that the taxpayer might be having more taxes withheld from their wages then is necessary for 2021. A taxpayer could submit a new Form W-4 to their employer and ask them to withhold additional taxes to avoid this issue. However, any advanced payments of the credit that the taxpayer receives would need to be subtracted from the credit they expect to receive.

How to Opt-Out from Payments

An individual may opt-out or unenroll from receiving advance payments and claim the entire credit when they file their 2021 return. A taxpayer may consider this option if they do not want to worry about paying back any amount next year, updating their information through the IRS portal, or adjusting their withholding. A taxpayer may also simply prefer to receive the child tax credit in one large payment as a refund in 2022 rather than smaller payments over the course of the year.

The taxpayer may unenroll by managing their advance payments through the CTC UP. To unenroll from the advance payments, a taxpayer generally must authenticate their identity. The deadline to unenroll is at least three days before the first Thursday of the next month. The taxpayer does not need to unenroll each month, just once.

The unenrollment deadlines are:

• August 2 for the August 13 payment
• August 30 for the September 15 payment
• October 4 for the October 15 payment,
• November 1 for the November 15 payment, and
• November 29 for the December 15 payment.

If the taxpayer misses the relevant deadline, the unenrollment is effective beginning with the following month’s payment. Married individuals filing jointly must both unenroll for the advance payments to stop completely. If only one spouse unenrolls, the other spouse continues to receive one-half of each advance payment.

Currently, a taxpayer generally cannot re-enroll in the payments once they have unenrolled. The IRS will provide a process to re-enroll starting in late September 2021.

No Effect on Credit Amount

A taxpayer that elects to opt out of the advance payments of the child tax credit is only delaying when they receive the credit. They will still receive the same credit amount.

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