Should you opt out of monthly child tax credit payments? (Article)
Should you opt out of monthly child tax credit payments?
Some of you may have gotten a letter in the mail from the IRS informing you that you will soon start to receive pre-payment of your 2021 child tax credit. To recap, The American Rescue Plan temporarily expanded the child tax credit for 2021 from $2,000 per child to $3,000 per child and $3,600 per child under age 6. The credit is reduced by $50 for every extra $1,000 in income over the $75,000 for single filers and $150,000 for joint filers. In an attempt to put more cash into the hands of consumers faster the Federal Government will pay half of this credit in advance starting in July 2021. For example: if you are under the income thresholds and have a 9-year-old and a 4-year-old child you will receive $550 per month ($250 for the 9-year-old and $300 for the 4-year-old) for the remaining 6 months of 2021. The rest of the credit will be claimed on your 2021 income tax return.
While eligible families will be automatically enrolled in the advanced payments you do have the option to unenroll from these payments. Why would you do that? I’m glad you asked.
If you have set up your tax withholding based upon the 2020 child tax credit of $2,000 you may end up owing the Federal Government when tax filing time comes. Continuing with the example above instead of having a $4,000 credit at the end of the year for the two children there will only be $3,300 left for your taxes.
Another reason you may opt out is if your income is higher in 2021. The tax credits are being paid out on an assumption that your income is the same as 2020. Again continuing with the example above if this family’s income goes up and they only qualify for the $2,000 credit they would only have $700 left in credit to claim on taxes potentially.
As we have demonstrated opting out of these payments may make a lot of sense for some parents. If you are not sure if this will have a negative effect on your taxes we recommend you consult with a tax professional to get it straight. It is never a good thing to get in trouble with the IRS!
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