Tax Tips — July 23, 2021

3 Reasons You Might Want to Opt Out of Advance CTC Payments

by Susannah McQuitty

Two options present many ways to receive the Child Tax Credit.

The Child Tax Credit (CTC) helps families with children 16 and younger reduce their taxes owed. Typically, the CTC is only available once per year—but starting July 15, families can get portions of the credit in advance.

Half of the credit will be split up into seven payments, one per month, and the second half will be available all at once when you file your taxes in early 2022.

Advance payments are a great deal for those in need of financial help before next year’s refund rolls around, but some people are opting to wait. If you’re having trouble deciding what to do, here are some reasons opting out might be the better option for your finances in the long run.

You’re not exactly sure how much of the Child Tax Credit you actually qualify for

The CTC takes your entire tax year into consideration when you file your tax return. That’s why, usually, you only get the credit once a year after you file your taxes—once the IRS has a clear picture of your entire year, they can calculate exactly how much you qualify for.

Advanced payments, on the other hand, can only estimate your tax situation for the entire year. The amount you qualify for could change, since your tax return is still going to determine the size of your credit.

If you’re sent more than you qualify for during the year, the IRS will want that back, which means your refund will be smaller, or you’ll have more taxes owed.

That said, there is a safe harbor rule that allows single taxpayers who make below $40,000 (or married taxpayers have modified AGIs below $60,000) to keep overpayments—you won’t have to pay back any extra funds you received in the advance payments.

You may prefer a bigger refund rather than more money throughout the year

“Do I go for a bigger refund or more cash throughout the year?”

That, my friends, is a question that people go back and forth on all the time—you can dive in more on our blog post on how to adjust your withholdings if you’re interested.

Ultimately, that answer is up to you. If you decide to get half of your CTC throughout the year, that’s great! You’ll have accessible money when you need it.

But if you’re used to getting the full CTC when you file your taxes, you’ll be missing that first half when you file in 2022. Anyone angling for a big refund should take this into consideration.

It’s possible to end up getting a tax bill next April if you take advanced Child Tax Credit payments

Wait, what? Isn’t the CTC supposed to help people?

Yes, and it still does. Let me explain.

A tax credit reduces the amount of taxes you owe. If you have already gotten the money throughout the year, the credit won’t be there when you file. You’re not losing money in the big picture, but you may have a bill on your hands instead of breaking even or getting a refund.

Now, the CTC is fully refundable, so it’s not extremely likely that you’ll end up owing taxes without it. Everyone’s situation is different though, and it is possible, so you should double-check.

You can use our Tax Calculator tool to see what you might owe with and without the CTC at tax time. Just estimate your taxes once with the CTC and once without to compare bottom lines.

So where do you fall?

Do you think it’s worth it to have advance payments or get everything in one lump sum? Either way, the bigger, fully refundable CTC is sure to benefit families on both sides. It’s especially helpful for those hit hard by the pandemic.

If you qualify for the CTC, the IRS will automatically enroll you in the advance payment option. Want to get the credit all at once instead? Just access the IRS portal to opt-out of advance payments—you’ll want to do it soon, since the deadline to unenroll from the August payment is August 2.

We hope this helps clarify your options for claiming the Child Tax Credit! Our goal is to make taxes for you and your family as simple as possible so you can get back to what you love.

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