Should You Opt-Out of the 2021 Child Tax Credit Advance Payments?

The IRS is sending letters to more than 36 million American families who may be eligible to receive “advance payments” of their 2021 child tax credit.  This means that instead of waiting until you file your 2021 tax return to claim your 2021 child tax credits, the IRS may make advance payments to you for up to half of your child tax credit amount. The first advance payments begin July 15 and will continue monthly throughout 2021.  The IRS has also made other changes to the program summarized below. 

Amounts and Age:  The child tax credit amount has been increased to $3,600 per child under age 6 and $3,000 per child ages 7 through 17.  This is up from $2,000 per child in 2020 and it increases the maximum age to qualify from 16 to 17.  

Refundable vs. Partially Refundable:  The credit is fully refundable which means it reduces your tax liability on a dollar-for-dollar basis, and if it exceeds your tax due, the balance is refunded to you.  (The 2020 credit was only partially refundable.)

Income Requirements:  The earned income is waived for 2021.

Income phase-outs:  The credit starts to phase out when your adjusted gross income exceeds:

$150,000 for Married Filing Jointly

$112,500 for Head of Household

$75,000 for Single

The credit phases out by $50 per $1,000 of income over the above thresholds. 

Advance Payments:  If you’re eligible, the IRS should automatically send you (via direct deposit or check) half of your estimated child tax credit for 2021, in monthly installments (up to $250 or $300 per month, per qualifying child, depending on age).  Payments start on July 15^th and continue through the end of the year.  The remaining half of the credit is applied when your 2021 tax return is filed.  

Opt-Out?  Eligible taxpayers are automatically “opted-in” to advance payments, but can choose to opt out upon request.  There are several reasons a taxpayer may want to opt out of these advance payments.  For one, if the credit typically reduces your tax due, then receiving advance payments could increase the tax you owe when you file your 2021 tax return.  Also, if the IRS sends you advances based on your 2020 income level, but your 2021 income exceeds the phase out amounts, you may need to return the tax credit payments you received when you file your 2021 tax return. 

IRS Portals.  The IRS has launched three online tools to help families manage the new Child Tax Credit program.  Each of the tools is described below, including links.  These websites will continue to be updated throughout the summer and fall seasons. 

Child Tax Credit Eligibility Assistant – allows families to answer a series of questions to quickly determine whether they qualify for the advance credit.  Click HERE.  

Child Tax Credit Update Portal - allows families to verify eligibility and also allows them to unenroll (or “opt out”) from receiving the monthly payments in order to receive a lump sum when they file their tax return next year.  Future versions will include the ability to change bank account information or mailing addresses as well as updating family status and changes in income.  Click HERE.

Non-filer Sign-up Tool – allows families who don’t normally file a tax return to check eligibility and register for the advance payments.  Click HERE. 

2022 and Beyond.  It’s unclear how long this program will last. These changes could be extended to 2022 and beyond, or may revert back to 2020 amounts and rules in 2022.