The IRS recently sent out a letter notifying you of how these advance child tax credit payments work. They also advised you at the bottom of the letter on how to opt-out of this program for those who would prefer to receive a larger refund (or lower tax liability) with their tax return.
This is NOT like the stimulus payments. This is the IRS sending you your tax credit (that is normally claimed on your tax return) earlier than usual. Typically, most clients prefer to keep the larger refund (or lower tax liability) at the end of the year rather than have a portion of the tax credit spread out over six months. Others may really need the funds right now – if this is the case, you may prefer not to opt out of the Advanced Child Tax Credit. Please keep in mind, if you choose this option, your refund may not be as large (or your balance due may be higher) on your 2021 tax return.
Here are some examples:
- If you are married with 2 kids aged 10 and 14 years old. Your taxable income is $35,000, and you’re used to getting tax refunds of $2,000 to $3,000 due to the child tax credit and the earned income credit. If you take the advance payments for your children from the IRS this year, you would get $3,000 spread out over the rest of this year ($500 a month until December). Then, when you have your tax return prepared in early 2021, your refund will only be approximately $1,000 to $2,000 dollars.
- You are married with 3 kids. The children’s ages are 11 years old, 8 years old, and 15 years old. Your taxable income is $100,000. Your refunds are usually only about $200 because you make sure that just barely enough is withheld from your paychecks to cover the tax you owe come tax time. You can expect to get $750 dollars per month through the advance payments, for a total of $4,500 by December. When you have your tax return prepared in early 2022, you would owe the IRS approximately $1,300.
If you’d like to opt-out, you can do so online at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.
The deadline to opt-out for July 2021 payments is JUNE 28, 2021. It is also important to note that both taxpayer & spouse will both have to opt-out in order to opt-out completely.
Otherwise, if only one spouse opts out, then you will still receive half of the advanced payment. If you do not opt-out by June 28, you will receive your July payment. You can opt-out after June 28, but it will not go into effect until the following month.