Why opting out of monthly child tax credit payments may work for some families

by Benjamin R. Bostic

Starting in mid-July through the end of the year, qualifying parents will automatically receive an additional $250 or $300 per month per child – unless they opt-out.

For some, opting out of receiving an advance on the enhanced annual Child Tax Credit – the latest part of the federal government’s COVID-19 relief – may make sense. With this in mind, the IRS recently opened their Child Tax Credit Update Portal, allowing parents to opt-out and receive the credit in a lump sum, as usually happens after they file their federal return.

• To learn more about the enhanced Child Tax Credit program and monthly payments, click here

Why might someone opt-out? One reason is that the payments are merely advances on the total credit a family will receive – meaning the amount left at the end of the year will be less than usual.

Especially for families who typically owe federal taxes, keeping the Child Tax Credit as a lump sum can provide a cushion.

Doing the math

For 2021, the Child Tax Credit was expanded from $2,000 per year per child to $3,600 for children ages five and under at the end of 2021; and $3,000 for children ages six through 17.

The IRS bases the monthly advances on half of the anticipated credit. For example, if you anticipate receiving a $3,000 credit, you will receive $250/month, or $1,500 before the year’s end ($250 X 6 months). You will get the remaining $1,500 with your tax return.

Larger families may need to take a closer look at their tax planning to determine if they should consider opting out or making other adjustments. As a father of three (ages 8, 6, and 3), the advanced monthly will provide my family with an additional $800 per month beginning in July.  Historically, I was eligible for a $6,000 child tax credit, but during 2021, my credit increases to $9,600.

In my case, I am good with receiving the monthly payments and the remaining half -- $4,800 – at the end of the year (though it will be less than the $6,000 lump sum I usually get).

However, I work with clients who love getting a big refund. They often opt to over-withhold taxes from their paycheck and treat their tax refund as a yearlong savings plan. Alternatively, if a family typically breaks even or owes despite ordinarily receiving the child tax credit, receiving the monthly advances will likely result in owing more than usual.

A caution for families whose eligibility may change

• Change in income: The IRS determines Child Tax Credit advances based on previous tax returns. Families that receive monthly advances and are later deemed ineligible will have to repay the money. If you anticipate your 2021 income to increase and make you ineligible for the credit, you will want to opt-out to avoid having to pay back the advances when you file your return.

• Change in dependents: Families should review their eligibility for the credit based on each child's age or applicable divorce agreements. As with a change in income, you will have to repay advance payments for ineligible children when you file your 2021 return.

 

Bottom line

Depending on your family’s tax situation, accepting the advance payments may or may not be a good idea. What is a good idea is to talk it over with your tax or financial advisor. As always, the expert team at Boyer & Ritter is ready to help with any questions and ensure you don’t have any unwanted year-end surprises.

Benjamin R. Bostic, CPA, is a director at Boyer & Ritter with experience providing tax and accounting services for closely-held businesses, individuals, not-for-profit organizations. Reach Ben at 717-264-7456 or bbostic@cpabr.com