If you are a parent, you may have noticed money deposited into your bank account or mailed to you starting in July of 2021. This money comes from the expanded child tax credit, which was signed into law as part of the American Rescue Plan Act.
In some cases, however, 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 in. 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 is now worth $3,600 for children under six and $3,000 for children ages six to 17. This additional funding is currently 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 is being distributed in advance.
Starting July 15, 2021, parents began receiving monthly payments of up to $300 for children under six and up to $250 for older children. The payments will be made on the 15th of each month (or the next business day) from July to December 2021. This will result in half the full credit being paid out in advance. The remainder can be claimed when filing your 2021 taxes.
The full credit is available to households with incomes up to $150,000 for married joint filers or $112,500 for single heads of household.
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, there are times when it could make sense to unenroll from receiving the advance payment of the child tax credit.
Here are some examples of when not opting out of the child tax credit payments could actually be a tax mistake:
1. Your income has increased
There are income limits on the child tax credit. The IRS is determining eligibility based on 2020 tax returns (or 2019 returns if those are the most recent year filed).
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 want to reduce your 2021 tax bill or get a larger refund in 2022
If you receive the child tax credit money now, you won't be able to claim this tax credit when you file your 2021 taxes.
If you expect to owe money to the IRS when filing your taxes, the child tax credit won't be available to offset this (as it might have in previous years). So you could end up with a larger bill that you have 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 is basing the amount of your credit based on your past tax returns. If you were claiming more children as dependents in 2020 (or 2019), then the IRS may calculate the amount of your child tax credit incorrectly.
That means you could end up getting more money than you are entitled to deposited into your bank account by the IRS, and you would have to pay it back later when you file your 2021 taxes.
4. You're divorced and taking turns claiming the credit
The IRS has no way to know 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.
If it was your turn to claim the child tax credit last year, so the credit showed up on your 2020 tax return, but it's your ex's turn this year, you could end up getting 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 do not want to receive the advance child tax credit payments, you can request the IRS stop sending them each month. You can do this by visiting the Child Tax Credit Update Portal.
You will need your existing IRS username and password if you have one. If you haven't ever created an online account with the IRS, you will need your photo identification in order to sign up.
You must unenroll from receiving the child tax credit by a specific deadline to avoid receiving the upcoming payments. Since the July, August, and September payments have already been delivered, you can only ask the IRS to stop sending payments going forward.
The table below shows the deadlines for unenrolling for each of the remaining payments that will be deposited to your bank account if you don't take action.
|Payment month||Deadline to unenroll||Date payments will be delivered|
Will advance child tax credit payments affect my other government benefits?
Advance child tax credit payments don't count as income or financial resources, so they will not affect any other government benefits you receive.
What if I don't want to receive child tax credit payments?
If you do not want to receive child tax credit payments, you can opt out at the Child Tax Credit Update Portal. You will need to sign in with your existing IRS user ID and password or will need photo identification in order to create an IRS account if you do not already have one.
Are child tax credit payments taxable?
Child tax credit payments are not considered income, and they are not subject to tax.
Understanding how tax credits affect your finances is very important. If you are currently receiving the advance child tax credit payments, this could affect your tax bill when you file your 2021 taxes. 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.
You should also remember that, as of right now, the expanded child tax credit is only available in 2021 — so you can't count on getting this extra money going forward. However, lawmakers are trying to extend the expansion of the credit for an unspecified number of years as part of an upcoming reconciliation bill that is still under negotiation. However, it is not clear if they will have the votes to pass this legislation or if the final bill will include this expansion.