It might make sense to opt out of extended child tax credits – here’s why

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Just as the Internal Revenue Service prepares to distribute millions of monthly child tax credit payments to American parents, some of them may want to consider jumping the money now – or prepare for a tax bill later, according to financial experts.

The rules on advance payments for the Child Tax Credit, or CTC, this year could cause parents who are close to income eligibility limits to choose to opt out so they can avoid repaying the amount back. tax time next year.

Single tax filers earning up to $ 75,000, individuals earning up to $ 112,500 when running as head of household, and married couples jointly filing a tax return who earn up to $ 150,000 are eligible for grants. payments.


“People have to watch this carefully. They don’t want to be unpleasantly surprised.


– Marianela Collado, Tobias Financial Advisors

Parents already close to those cutoffs need to think especially if they get raises this year and higher paying jobs that will knock them out of income eligibility, they say.

“People need to take a close look at this,” said Marianela Collado, co-owner and CEO of Tobias Financial Advisors. “They don’t want to be unpleasantly surprised.

The IRS unveiled the online portal on Tuesday where households can retire to receive the installments, which will come in monthly installments.

The first payments come out July 15, and June 28 is the deadline to skip the July payment, according to the IRS. August 2 is the deadline to skip the August 13 payment and August 30 is the last day to skip the September 15 payment.

At this time, someone cannot choose to receive the money again after opting out. The opportunity to re-register will begin in late September, according to the IRS.

The Child Tax Credit Has Unique Rules This Year

For decades, the credit has been paid as a lump sum, part of the refund people receive at tax time. The $ 1.9 trillion US bailout passed in March increased the payment amount and said half of the credit can be paid in six monthly advance payments. Monthly bills don’t wait for tax refunds to hit checking accounts, lawmakers and lawyers have said.

For this year, the amount of the CTC goes from $ 2,000 to $ 3,600 per child for children under 6 years of age. Parents of young children will receive $ 300 per month because half of $ 3,600 equals $ 1,800 and $ 1,800 divided by six equals $ 300. The CTC payment is $ 3,000 per child aged 6 to 17 and the parents of these children will receive $ 250 per month.

The income limits for receiving full payments reflect the rules for eligibility for stimulus checks.

But there is an important point: The IRS uses the income information from the 2020 tax returns (or 2019 if the 2020 returns are not yet available) to determine the eligibility and amount of advance payments. But these are still prepayments for a loan on a 2021 tax return.

So if that 2021 return ultimately reveals an overpayment after taking into account a taxpayer’s income and household circumstances, the IRS will want to recover the excess money.

The IRS said it would subtract the excess amount from a taxpayer’s refund. If someone owes taxes, including the CTC’s overpayment obligation, the IRS says it can set up installment plans.


“If you’re worried about reaching the upper limit, why even take the risk? Log out. ‘


– Marianela Collado, Tobias Financial Advisors.

“If you’re worried about hitting the upper limit, why even take the risk? You just have to withdraw, ”Collado said. The worst that can happen is to go under the limit and get full credit during tax season, she said.

There is no additional penalty if a person has to repay the advanced money, Collado noted.

Someone who expects to repay the CTC advances could potentially put the money in something like a savings account and earn interest before tax season, said Alvin Carlos, financial planner and managing partner of District Capital Management, a financial advisory firm located in Washington, DC

But this decision is not for everyone, he said. “It’s really the emotional impact of having to pay,” said Carlos.

He plans to talk to several clients about skipping advance payments, including one who no longer has a job raising the couple’s young child, but is now considering returning to work.

Too much income may force you to repay

People whose number of reported dependents changes from year to year might also consider opting out, said Jeremiah Barlow, head of family wealth management services at Mercer Advisors.

For example, he said, it is common for divorced parents to alternate years in which they declare their children to be dependent for CTC purposes. If 2021 is a year off for parents, Barlow has said they should step aside.

On the other hand, if a couple are married and file jointly, they both need to withdraw. Otherwise, they will still receive half of the prepayment, he said.

Another group of people who should consider opting out are parents with older children who were declared as dependents in 2020 but will not be declared as dependents in 2021.

Here’s where the IRS refund protection rules might help those with no fewer dependents.

Single tax filers earning less than $ 40,000 on their 2021 return – $ 50,000 for the head of household and $ 60,000 for married couples – do not need to repay the excess amount. Above these points, the protections fade and disappear for people earning $ 80,000, heads of households with $ 100,000 and married couples with $ 120,000.

How to guess 2021 income now – and tax tactics to reduce it

When deciding whether or not to opt out of payments, part of a person’s challenge may be estimating how much money they will make in 2021 with six months remaining.

There are several ways to make an educated guess, Barlow said. The first is to consult the most recent tax return. (The amount of income that the IRS is looking for, “Adjusted adjusted gross income” is found on line 11 of Form 1040.)

Another way is to ask tax professionals to project income and tax payable in 2021. There is also the “back of the towel” approach, which adds up income from W2 and other forms. related to income like 1099. From there a person can subtract the standard deduction. (It’s $ 25,100 this year for married couples and $ 12,550 for individuals.)

The IRS has also launched an online tool that can help people determine their eligibility. The link is here.

What if someone is just around income limits but is determined to get the prepayments? This is where tax planning comes in, note Barlow and Collado.

One way to do this is to increase 401 (k) contributions which, in turn, will reduce taxable income. The contribution limit is $ 19,500.

IRA contributions can also reduce adjusted gross income, but keep in mind that deduction rules can get complicated and have limits based on marital status, income, and access to a plan. retirement through work.

“Your best bet is really to bet on the 401 (k) to reduce that number,” said Collado, referring to adjusted gross income.

Another strategy is to contribute to a health savings account which can also reduce adjusted gross income, she said. People with a high deductible health care plan can use HSAs, contributing up to $ 3,600 for plans with individual coverage and $ 7,200 for plans with family coverage.

Getting away from the money might seem like a big decision, but Barlow stressed that a person can decide at any time to skip CTC advance payments.

As for potential tax strategies, he said, “there is a lot of time to plan”.

See also: Some Families May Have To Pay Back Their Child Tax Credit – 4 Key Differences From Stimulus Checks


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