Opting Out of 2021 Advance Child Tax Credit Payments? Here’s What You Need to Know

by Prof. Robert Bloink and Prof. William H. Byrnes

Under the ARPA, taxpayers who qualify for the child tax credit are now eligible to receive advance payments of the credit beginning in July 2021, based on 2020 income. For many Americans, these advance payments will provide a valuable cash infusion each month. For others, they could create a tax headache when it comes time to file 2021 income tax returns. Taxpayers are permitted to opt-out of the advance payments, but they have to act quickly in order to take advantage of the option—or risk an unanticipated tax bill in 2022.

Advance Child Tax Credit Payments: The Basics

Eligible taxpayers don't have to take any action to receive the refundable tax credit payments on the 15th of every month. Monthly payments will total up to $300 for each child under age six and up to $250 per month for each child aged six and older (the child must be younger than age 18 as of January 1, 2022 to qualify). Depending upon the information the IRS has on file, payments will be made via direct deposit, paper checks or debit cards.

The credit can be reduced to a total of $2,000 per child (annualized) if the taxpayer earns more than $150,000 (joint returns), $112,500 (heads of household) or $75,000 (single filers). The credit can be further reduced for taxpayers who earn at least $400,000 (joint) or $200,000 for all other filing statuses.

In total, advance payments for the year will equal up to 50% of the amount the taxpayer is eligible to receive based on 2020 filing information (2019 information if 2020 tax information is not available). If, based on 2021 tax information, the taxpayer was not eligible to receive the advance payments, the IRS will require repayment. The taxpayer’s otherwise available refund can be reduced, or the taxpayer may owe for underpayment.

According to new IRS guidance, taxpayers who were not otherwise required to file tax returns for 2020 can file simplified returns for 2020 to receive monthly advance payments of the expanded child tax credit. Those taxpayers can file Form 1040, Form 1040-SR or Form 1040-NR, providing information such as Social Security numbers and addresses on the returns and must write "Rev. Proc. 20214" on the forms. Taxpayers who had $0 in adjusted gross income (AGI) can report $1 in AGI in order to file electronically and qualify for advance payments.

Should You Opt-Out?

Every taxpayer’s situation is different. It’s possible that some clients may appear to qualify for the child tax credit based on reduced income during the COVID-19 pandemic during 2020. If the client no longer qualifies based on a rebounded 2021 income (or if the child turns 18 before January 1), they’ll end up with a lower refund or an unexpected tax bill.

Some clients may qualify for the child tax credit but not actually need the advance payment to make ends meet. It’s possible that those clients may rely upon a refund at tax time to make large purchases or pay down bills. Those clients should be advised that they’ll likely have a lower refund if they accept the advance payments in 2021.

Clients who opt out of the advance payment structure remain eligible to claim the child tax credit on their 2021 return.

To opt-out, the taxpayer must complete an enrollment form that’s available via the Manage Payments Portal on the IRS website (the same portal can be used to manage how the client receives the payments). For married couples, each spouse is required to complete a form (otherwise, the spouse who doesn’t opt-out will receive half the available amount).

The taxpayer will need to sign in with their IRS username or create an account to access the opt-out form. Creating a secure account also requires a U.S. photo ID and access to a smartphone.

The first opt-out deadline was June 28, 2021. However, there will be additional opt-out deadlines each month until the end of the year (the next deadline is August 2, 2021).

Conclusion

Advance payment of the child tax credit can offer a lifeline for some clients who are struggling to make ends meet during 2021. However, accepting the credit can complicate tax filing next year, meaning that some clients might prefer to simply opt-out and evaluate their eligibility once tax time rolls around again.

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