4 Smart Reasons to Unenroll From the Child Tax Credit

If you are a parent, you may have noticed money deposited into your bank account or mailed to you in 2021. This money came from the expanded child tax credit, which was signed into law as part of the American Rescue Plan Act. 

However, this plan was not extended, and the child tax credit has reverted back to the rules that applied to 2020 tax returns.

In some cases, you might want to unenroll from the child tax credit as one of the key moves to make before you file taxes. Doing so could help you to avoid a bigger tax bill later. Here's why.

What is the child tax credit?

When diving into the specifics of the child tax credit, it's important to understand the difference between tax credits versus deductions. Credits reduce your taxes on a dollar-for-dollar basis, while deductions simply reduce your taxable income. A $2,000 credit would reduce your tax bill by $2,000, while a $2,000 deduction would cut the income you pay taxes on by $2,000. With a deduction, your tax bill would be reduced based on how much you save by not paying income tax on that $2,000.

The child tax credit has long been available, but the rules were changed in 2021. Previously, the child tax credit was worth up to $2,000 per child, and just $1,400 of it was refundable. That meant people who didn't pay a full $2,000 in taxes for a given year would not necessarily be able to claim the entire credit. The credit could reduce their tax bill all the way to $0, and they could get up to $1,400 more back than the total taxes they paid. So someone with a $0 tax bill would miss out on $600 of the credit and receive only the $1,400 refundable portion.

When was the child tax credit raised?

The credit was raised by the American Rescue Plan Act, the coronavirus relief legislation signed into law by President Joe Biden in March of 2021. It was worth $3,600 for children under six and $3,000 for children ages six to 17. This additional funding was available only for the 2021 tax year. And, while parents previously accessed the child tax credit by filing taxes and claiming it, some of the newly expanded credit was distributed in advance.

Starting July 15, 2021, eligible families began receiving monthly payments of up to $300 for children under six and up to $250 for older children. The payments were made on the 15th of each month (or the next business day) from July to December 2021, resulting in half the full credit being paid out in advance. The remainder could be claimed when filing 2021 taxes. The full credit was available to households with incomes up to $150,000 for married joint filers or $112,500 for single heads of household in 2021.

What is the child tax credit for tax year 2023?

Lawmakers were unable to make a deal before Congress adjourned at the end of 2022, so the rules for the child tax credit have returned to those in place for 2020. Some of the rules for tax year 2023 include:

• Age: A child must have been under the age of 17 at the end of the year when you take the credit.
• Relationship: The child must be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (i.e. a grandchild, niece, or nephew).
• Financial support: The child must not provide more than half of their own financial support during the year.
• Dependent: You must claim the child as a dependent on your tax return. There are requirements for what qualifies a child as a dependent. 
• Citizenship and residency: The child must be a citizen or national and have lived with you for more than half of the tax year when you take the credit. There are some exceptions to this rule, check the IRS website or consult a tax professional to see if you qualify.
• Family income: The Child Tax Credit phases out depending on your modified adjusted gross income (MAGI), which is determined by your filing status. For tax year 2023, the phaseout begins with $200,000 in income for individual filers, or $400,000 for those married filing jointly.

IRS.gov has an interactive tool that lets you know if you qualify for full, partial, or no credit.

Why you might want to unenroll from child tax credit payments

While it may seem nice to get this money deposited into your bank account, it could have made sense to unenroll from receiving the advance payment of the child tax credit. Here are some examples of when not opting out of the advance child tax credit payments could have been a tax mistake:

1. Your income has increased

There are income limits on the child tax credit. The IRS determines eligibility based on previous years' tax returns.

If you qualified based on your past tax returns but don't qualify this year because your income is now too high, you might receive the money from this credit only to be required to pay it back when you file your taxes.

This could result in a larger tax bill later, which could make it more difficult to figure out how to manage your money since you'd need to plan to write a big check to the IRS.

2. You wanted to reduce your tax bill or get a larger refund

If you received the child tax credit money in advance, you weren't able to claim this tax credit when you filed your taxes. If you expected to owe money to the IRS at tax time, the child tax credit wouldn't be available to offset this. So you could end up with a larger bill to pay next year when you file taxes.

Some people also like to receive a big tax refund, perhaps because it gives them a lump sum of money to use for big goals such as debt repayment. But by receiving the child tax credit payments in advance instead of when filing your taxes, you'll receive a smaller refund.

3. You are no longer eligible to claim all your children

Remember, the IRS based the amount of your credit based on your past tax returns. If you were claiming more children as dependents in previous years, then the IRS may have calculated the amount of your child tax credit incorrectly.

That means you could have gotten more money than you were entitled to deposited into your bank account by the IRS, and you would have had to pay it back later when you filed your taxes.

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

The IRS has no way of knowing whose turn it is to claim the child tax credit or even that you have set up this arrangement since they are going only based on old tax returns, so you could have gotten money from the IRS that your divorce agreement specifies belongs to the other spouse.

This could create a legal hassle where you have to repay your spouse some of the credit that was due.

How and when to unenroll from the child tax credit

If you didn't want to receive the advance child tax credit payments, you could request the IRS stop sending them each month by visiting the Child Tax Credit Update Portal using either an existing IRS username or ID.me account. The portal is no longer available since the credit hasn't been extended.

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Bottom line

Understanding how tax credits affect your finances is very important. If you received advance child tax credit payments, this could have affected your tax bill when you filed your 2021 taxes. The expanded child tax credit was only available in 2021 — so you can't count on getting this extra money when you file your taxes this year.

The best tax software can help you to determine what, if anything, you owe the IRS and can assist you in maxing out any deductions and credits you are eligible for that will help you save.