The Enhanced Child Tax Credit: Can taxpayers opt out, and why might taxpayers want to?

Yes, taxpayers can opt out! While the monthly payments of the enhanced child tax credits, passed last spring by Congress as part of the American Rescue Plan, are helpful to many American families, they could actually create issues for others, with some taxpayers actually owing money to the federal government next year if they were to receive such tax credits now.

The IRS sent the first round of enhanced child tax credits payments to eligible families on July 15, 2021, while the second payment was sent August 13. Additional payments will arrive on September 15, October 15, November 15, and December 15.

How do the new enhanced child tax credits work?

The American Rescue Plan increased the child tax credit to $3,000 per child ages 6 to 17 and $3,600 for children under the age of 6 for the 2021 tax year. The new enhanced child tax credits, which specifically cover teens who are 17 for the first time, are income-based and would start to phase out for individuals earning more than $75,000 a year or $150,000 for those married filing jointly. Thereafter, the child tax credits would be reduced by $50 for every additional $1,000 of adjusted gross income earned above those thresholds and  would be phased out completely for individuals earning $95,000 and those making $170,000 and filing jointly. Noteworthy, families that are ineligible for the new $3,000 credit due to earning higher adjusted gross incomes would still be able to claim the $2,000 per child credit which is available to those families making up to $200,000 ($400,000 for married couples filing jointly).

For a child to qualify for the new enhanced child tax credits, the child must be claimed as a dependent on the taxpayer’s tax return. Further, the child must be related to the taxpayer and generally live with the taxpayer for at least six months during the year. He or she must also be a citizen, national or resident alien of the United States and have a Social Security number. Additionally, the filing taxpayer must put the child's name, date of birth and SSN on their tax return.

With that said, why would taxpayers want to opt-out of the monthly child tax credit payments?

If a taxpayer does not have a need the money through the end of the year, the taxpayer might be better off taking the full credit on the taxpayer’s 2021 tax return (filed in 2021), which would lower their 2021 tax bill or could increase the tax refund amount. Further, the current monthly child tax credit payments are based on a taxpayer’s 2019 or 2020 federal tax return. However, the credit amount will ultimately be based on the information reported on a taxpayer’s 2021 federal return. Therefore, if the taxpayer’s circumstances change significantly in 2021, the taxpayer could end up being paid too much in monthly tax credit payments. These changes in circumstances could happen, for example, if the taxpayer’s income increases in 2021, and the taxpayer can no long claim a child as a dependent in 2021 (i.e., because of alternating custody under a divorce decree), or if the taxpayer’s child turns 18 anytime in 2021 (thus terminating the right to claim the credit for that year).

How does a taxpayer out opt of these monthly child tax credit payments?

The IRS created a Child Tax Credit Update Portal to manage taxpayer’s monthly child tax credit payments. For a taxpayer to stop payments, the taxpayer needs to use the Child Tax Credit Update Portal (to sign-in, taxpayers will need either an existing IRS username or an account.). Note, it could take the IRS up to seven calendar days to process your unenrollment request. Further, if the taxpayer is married and files a joint tax return, the taxpayer’s spouse will need to also opt-out since unenrolling only applies on an individual basis. Lastly, there are also monthly opt-out deadlines to cut out individual payments before the next one arrives. To do this, the taxpayer must effectively unenroll by at least three days before the first Thursday of the month in which that payment is scheduled to arrive (i.e., 8/30/21, 10/4/21, 11/2/21, and 11/29/21).

So, yes, you can opt out of the monthly child tax credit payments, and there might be good reason to do so!

  • William M. Howieson

    Will provides strategic tax advice to companies throughout the entire business lifecycle: he advises clients on entity formation and corporate structure, mergers, acquisitions, dispositions, exchanges, restructurings ...

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