Child Tax Credit Payments Have Begun. Should You Opt Out?

In such cases, the spouse receiving the credit should opt out through the I.R.S.’s portal, otherwise they may have to repay the money when they file their return. Although the spouse claiming the children will not get the advance payments, they will be able to get the full value of the credit on their 2021 return.

If your income rose or you’re a higher earner

Since the advance payments are based on the income reported on your 2020 tax return (or 2019, if 2020 was unavailable or not yet processed), households with higher earnings in 2021 may be eligible for a smaller portion of the credit, which means they could be receiving too much in advance.

Households that have taken retirement distributions or collected any other type of unearned but taxable income will need to take that into consideration as well, accountants said.

Higher-income taxpayers may also want to consider opting out, tax experts said, because they are entitled to a smaller version of the child tax credit, or the $2,000 per child available under prior law (that translates into payments of $1,000 per child, spread over six months). If taxpayers didn’t factor that into their tax withholdings, they may end up with a lower refund or a higher tax liability come tax season.

You can get the full credit if your modified adjusted gross income (For most people, Line 11 of the 2020 Form 1040) is $75,000 or less for single filers, $150,000 or less for married couples filing a joint tax return and $112,500 or less for “head of household” filers (often unmarried single parents). The credit begins to decline above those thresholds — in two different steps — until it phases out completely.

You can check your eligibility for the credit using the I.R.S.’s Child Tax Credit Eligibility Assistant.

If you’re self-employed

Many freelancers, independent contractors and other self-employed people send the I.R.S. estimated tax payments based on the prior year’s income. But tax experts said that those payments and the money being advanced for the child tax credit could cancel each other out to some degree, which means the taxpayer could end up owing more when they file their return, and potentially could incur interest and penalties.

Article source: https://www.nytimes.com/2021/07/25/your-money/child-tax-credit.html