You Might Consider Opting Out Of The Child Tax Credit. Here's Why

Jul 28, 2021
Originally published on July 28, 2021 8:58 am

For many, it was a welcome surprise. On July 15, cash flowed into the bank accounts of parents across the U.S. as the government rolled out the first monthly payments of the enhanced child tax credit passed by Congress this spring.

But as helpful as those payments are to a lot of families, they could actually create headaches for others, with some people owing money to the government next year.

As a result, some parents have already opted out of the monthly payments and are instead choosing to receive the entire credit next year when they file their taxes.

Keep in mind, the Internal Revenue Service is making these payments based on your last tax filing. It's the government's best guess about what your family is due. Half of the tax credit is being paid out now in monthly payments through December. You then claim the rest when you file taxes next year.

But a lot of things can change from year to year.

So you may be getting more money in those monthly payments than what you are owed, and you will be on the hook to pay some, or even all of it, back to the government when you file your tax returns next year.

One exception to this: If you earn less than $40,000 as a single filer, $50,000 as head of household, or $60,000 for married couples filing jointly, you won't have to repay any of the money, even it there was an overpayment.

Here's how to decide what makes sense for you.

Who should opt out of the monthly payments?

First off, if you simply prefer to get a big tax credit in the spring as you always have, opting out may be for you. Perhaps you always count on having the child tax credit to offset taxes owed. Or maybe you look forward to receiving a big refund every spring.

Saby Montoya is in that camp. She opted out of the monthly payments after being surprised by the first one.

"With the large bulk amount, it just takes care of a lot more things," says Montoya, who has a 12-year-old son.

She uses her tax refund to pay bills, pay for her son's classes, and celebrate his birthday, among other things.

But there may be other, more pressing reasons to opt out.

LuSundra Everett, owner of Everett Tax Solutions and an enrolled agent, suggests thinking ahead to what your 2021 tax return will look like. If you're expecting major changes from 2020, you might consider stopping the monthly payments now. For example:

1. Your income went way up in 2021.

A lot of people took a hit to their income in 2020 due to the pandemic. Maybe you stopped working for a period, or you were forced to take a major salary cut. If your family's income recovered in 2021, putting you above $75,000 for single filers, $112,500 for head of household, or $150,000 for married couples filing jointly, your child tax credit begins phasing out.

But the IRS doesn't yet know about this increase in income, and so the advance payments going into your bank account every month could be an overpayment.

"If you don't want to be in a position where you have to pay money back, then opting out is the safest thing to do," says Everett.

2. You're divorced and taking turns claiming the credit.

Everett uses the example of parents she calls Mary and Bob, who are divorced and have one child.

If Bob claimed the child on his 2020 tax return, he would have automatically begun getting the monthly payments on July 15. But Bob is not going to claim the child on his 2021 tax return, because it's Mary's turn.

So Bob ends up owing the government all the money he got through the monthly payments. Mary, meanwhile, has not been getting the monthly payments, so she will get the entire tax credit as one lump sum when she files her taxes.

3. Your child is now officially an adult!

The 2021 Child Tax Credit covers children from birth to 18. If your child turns 18 anytime in 2021 (even on Dec. 31, 2021), he or she is not eligible for the credit. The IRS should have taken this into account in estimating the amount of your monthly payment, but it's best to double-check.

If you are mistakenly getting monthly payments for that child, you will have to pay the money back.

Likewise, if you have a child who turns 6 this year, you may want to double-check that the monthly payment you're getting for that child is correct. The 2021 credit provides up to $300 a month for children under 6 and up to $250 a month for children ages 6 to 17.

OK, I've decided to opt out. How do I do it?

The IRS has created a website for managing your monthly payments. To stop the payments, you need to create an account with the IRS using a third-party app called ID.me. Heads up: It's not the most user-friendly of apps. You'll need to verify your identity by scanning a government ID as well as your face. Prepare to be patient.

You can also unenroll over the phone, but that may require even more patience.

An important note: If you're married and filing jointly, both parents need to opt out. If only one parent unenrolls from the monthly payments, you'll still get half the amount deposited into your bank account.

You have an opportunity every month through December to unenroll before the next payment lands. The deadline is three days before the first Thursday of every month.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

SARAH MCCAMMON, HOST:

Many parents all across the U.S. saw hundreds of dollars land in their bank accounts earlier this month, the first monthly payment of the expanded child tax credit. But not every parent wants that money. And some are opting out. NPR's Andrea Hsu is here to talk about why. Good morning, Andrea.

ANDREA HSU, BYLINE: Good morning, Sarah.

MCCAMMON: So what is going on? Why are people opting out of this?

HSU: Well, just to be clear, they're not turning down the money. It's all about when they get the money. And for some people, getting it now might not be in their favor. So, you know, in the past, the child tax credit would come as one lump sum when you filed your taxes. It could help offset what you owed. Or if you didn't owe taxes, you got a nice, big refund. For 2021, the government said, hey, we're going to give parents half the credit this year and the other half next year when you file your taxes. And this year's half is going out to parents in the form of these monthly payments. The next one's coming mid-August. And if you want to stop that payment, you have to opt out by Monday.

MCCAMMON: What if you're listening to this and thinking, is this a good idea for me? Why would someone opt out?

HSU: Well, some people just like to get a big check in the spring. Take Saby Montoya. She's the mom of a 12-year-old boy. Every year in the spring, she looks forward to having a big refund, which she uses to pay off bills or pay for her son's classes. Sometimes she does something nice for his birthday. So she opted out after being surprised by the first monthly payment.

SABY MONTOYA: I didn't want to keep receiving it, and then come March, April, I put in my taxes and then I don't get what I normally get in return.

HSU: But there's another important reason why some people should opt out, Sarah. The money the government is sending now, it's their best guess of how much your family is due. And that's based on your last tax return.

MCCAMMON: So it's an estimate. It could be wrong. What would that mean for families at tax time next year?

HSU: Yeah, it could be too much. And that could be a problem. I talked to LuSundra Everett of Everett Tax Solutions about this. Her advice is to think about what your 2021 return is going to look like. And if there are major changes, then consider opting out of the monthly payments.

LUSUNDRA EVERETT: You know, if you don't want to be in the position where you have to pay money back, then opting out is the safest thing to do.

HSU: So one example of this is people whose earnings went way up last year. This could be true of a lot of people who didn't work for part of 2020 because of the pandemic. Maybe they went back to work this year or got a new job. Well, the child tax credit starts phasing out when you hit a certain income level. But the IRS doesn't yet know that you're making more money in 2021. So they're still assuming you qualify for the full credit. And you could end up having to pay some of that back.

MCCAMMON: OK. So that's one scenario. Are there other situations you can think of, Andrea, where people might want to opt out of this child tax credit?

HSU: Yes. Well, another is specific to parents who are divorced who take turns claiming the children. Whoever claimed last year has probably already started getting the monthly payments. So if that parent isn't going to claim again this year, they should unenroll now.

MCCAMMON: And how does the age cutoff work? For these purposes, who's considered a child who's eligible?

HSU: So any child from birth to 17 is eligible. If your child turns 18 any time in 2021, they're not eligible. Now, if your child is turning six any time this year, the amount of credit actually drops a little bit. The IRS told me that the monthly payments going out should reflect how old your kids are. But if you have one who's turning six or 18 this year, you might just want to double check how much you got in the first payment.

MCCAMMON: And really quickly, if you want to opt out, how do you do it?

HSU: Well, it is a little complicated. You go on the IRS website. Just Google IRS child tax credit. You see a button called manage payments. Then you have to create this account on this app. You need to scan an ID and also scan your face. It's kind of glitchy, so you have to be patient. But here's another thing. If you're married and filing jointly, both parents need to opt out. If only one parent does it, you'll still get half the payment. And don't forget to enroll by Monday if you don't want the August one.

MCCAMMON: All right. That's NPR's Andrea Hsu. Thank you.

HSU: Thanks, Sarah. Transcript provided by NPR, Copyright NPR.