Should you Opt Out of the Monthly Advance Child Tax Credit Payments?

Sample Advanced CTC Check

Should you Opt Out of the Monthly Advance Child Tax Credit Payments?

With the monthly Advance Child Tax Credit Payments starting to be sent out in mid-July, we’ve received several inquiries from clients as to whether or not they should opt out of these payments (to avoid potentially having to pay it back when they file their 2021 returns).

As such, I thought it would be helpful to provide an overview of how it works, how to calculate your 2021 amount, and how to decide if you should opt out of the monthly advanced payments.

 

By Laurence Schiffman, CFP®

September 11, 2021

 

Estimated Read Time:  12-14 minutes

If you don’t care about the details, scroll to the section below the calculation boxes for the questions that will help you decide if you should opt out of the payments

 

Changes to the Child Tax Credit (for 2021 only)

The Biden administration made a few changes to the Child Tax Credit (CTC), namely:

  • Increasing the amount of the credit (with new phase-out limits for the increased portion)
  • Making 17-year-old children eligible for the credit
  • Making the entire tax credit refundable (meaning it can reduce your taxes below zero, with the difference being refunded back to you)
  • Creation of the Advance Child Tax Credit Payment program

 

Tax Credit Amount

The amount of the CTC is based on the number of eligible children, each child’s age (as of 12/31/2021), and your modified Adjusted Gross Income (MAGI). The maximum credit amount for 2021 is:

  • $3,600 for each child under the age of 6, plus
  • $3,000 for each child between the age of 6-17

 

Your Maximum 2021 CTC Before Any Phase-Outs

 

What is the Advance Child Tax Credit Payment Program?

To increase monthly cash flow for families, one of the changes the Biden administration made was to prepay 50% of the projected CTC, every month, starting on July 15th and continuing through the end of the year. The payments will be sent using the same method used for your 2020 tax payment/refund (i.e. check or direct deposit).

The remaining 50% is applied when your file your 2021 return, along with any adjustments to the amount you actually qualify for. Since this can lead to an unwanted increase/decrease in the amount of your refund (or tax bill), the IRS is allowing taxpayers to voluntarily opt out, if they wish to do so.

 

Monthly Payment Amount

Unless you voluntarily opted out, your payments will automatically be sent out if you claimed the CTC on your 2020 return (2019 if your 2020 return hadn’t been processed yet), based on what you are projected to be eligible for in 2021.

The projected credit amount assumes your MAGI remains unchanged from the prior year, applying the phase-out limits accordingly. This means that if you were eligible for any portion of the CTC on your 2020 return (and haven’t opted out), you will most likely receive something.

If your MAGI was below the first phase-out range (see below), you should receive $300/month for each child under the age of 6 and $250/month for each child between the ages of 6-17.

 

Income for Phase-out Limits

The phase-out limits for the CTC are based on your MAGI, which for most will be their AGI. While the IRS has many different definitions for MAGI, depending on what it is being used for (thank you again for making the tax code even more confusing), for the CTC it is defined as:

  • AGI (Form 1040, Line 11 for 2020), plus
  • Any amounts on Form 2555, Lines 45 or 50 (Foreign Earned Income), plus
  • Any income received from Puerto Rico or American Samoa that was excluded from gross income

 

First Phase-Out Range

The first phase-out range applies to the credit amount for each child individually. The amount of each child’s credit is reduced by $50, for every $1,000 of MAGI above the threshold, but won’t reduce the credit amount below $2,000/child.

 

MAGI Limits for First Phase-Out Limits (Ages 0-5)

 

Your Remaining CTC for Children Under 6 After the First Phase-Out

 

MAGI Limits for First Phase-Out Limits (Ages 6-17)

 

Your Remaining CTC for Children Ages 6-17 After the First Phase-Out

 

Total CTC After the First Phase-Out Limits are Applied

 

Second Phase-Out Ranges

The second phase-out range applies to the total tax credit remaining after the first phase-out has been applied. Like the first phase-out, the reduction amount is $50, for every $1,000 of MAGI above the threshold, and can reduce the tax credit to $0. The second phase-out kicks in at:

  • $400k for MFJ
  • $200k for everyone else

If your MAGI is above the second phase-out threshold, you can calculate the CTC that you will be eligible for as follows:

 

Step 1 for Second Phase-Out Calculation

 

Step 2 for Second Phase-Out Calculation

 

Step 3 for Second Phase-Out Calculation

 

Remaining 2021 CTC After Phase-Outs

 

Should You Opt Out?

So back to the question at hand; should you opt out of the monthly advanced payments? The following questions will give you your answer (in order of importance):

 

  1. Are you expecting to owe money when you file your 2021 return?
        • You don’t have enough withheld from your paychecks
        • You have income/gains from investments, or are self-employed, and haven’t paid enough in quarterly estimates
        • You had taxable events related to employer stock awards and not enough was withheld for taxes (which is fairly common)

If so, you should probably opt out because the advanced payments will simply increase the amount you owe (and any interest/penalties related to underpayment).

 

  1. Will the number of children, eligible for the CTC in 2021, be less than those eligible in 2020?
        • You claimed the CTC in 2020 but weren’t eligible for it
        • You are divorced, or file MFS, and each parent alternates claiming the child(ren)
        • You lived overseas for more than 6 months in 2021 (some exclusion apply)
        • Your child provided more than half of his/her own financial support in 2021
        • Your child lived with you for less than 6 months in 2021 (some exceptions apply)

If so, and the number of children that will qualify in 2021 will be less than 50% of those eligible in 2020 (e.g. three children were eligible in 2020 but only one will be eligible in 2021), you should give serious consideration to opting out (especially if you answer yes to any of the other questions).

If not, or at least half of the children eligible in 2020 will be eligible again in 2021, you don’t have to worry about opting out for this reason alone and can move on to the final question to consider. The reason for this is that the advanced monthly payments only account for 50% of your projected 2021 CTC amount (e.g. going from two eligible children in 2020, down to one in 2021, would simply eliminate any additional CTC amount when you file).

 

  1. Will your MAGI be significantly higher in 2021, compared to 2020 (or 2019 if you filed an extension)?
        • You got a promotion, your bonus/commissions went up, or you changed jobs and are making a lot more now
        • You had larger taxable events related to employer stock awards in 2021
        • You were unemployed/underemployed for part of 2020 due to COVID
        • Your spouse returned to work or is making much more than he/she did in 2020
        • You recognized a lot more in capital gains in 2021 (e.g. trading in a taxable investment account, sold a business or real estate property, etc.)
        • You own a business and your net income is significantly higher (e.g. rebound from COVID, large capital expenditures or depreciation deductions taken in 2020, etc.)
        • You received unemployment income in 2020 and a portion was tax-exempt (which could have been as much as $10,200/spouse)
        • You received a taxable distribution from a retirement account, pension, or deferred compensation plan
        • You did a Roth Conversion
        • You got married in 2021 and your new spouse is a high-income earner
        • Your Above the Line deductions (which excludes the itemized/standard deduction and any QBI deductions) will be lower
              • Pre-tax payroll deductions (e.g. reduced pre-tax retirement plan contributions or switched to Roth, your cost for health insurance decreased, reduction in FSA or HSA contributions, etc.)
              • Schedule 1 deductions (e.g. deductible alimony payments ended, no longer eligible to contribute to an HSA or you can’t contribute as much because you switched to an individual plan, you’re a business owner and your self-employed health insurance and/or retirement plan deductions will be lower, no longer eligible to make tax-deductible IRA contributions, etc.)

Even if some of these are applicable, if you expect your MAGI to be below $400k ($200k for everyone not filing MFJ), and neither of the first two questions applied to you, you probably don’t need to worry about opting out. This is because the most you can receive from the advanced monthly payments is $1,800/child ($1,500 for those 6-17), and the credit won’t get reduced below $2,000/child unless you are subject to the second phase-out threshold.

For everyone else who answered yes to this, the opt out decision should be based on the amount of the increase, as well as whether either of the first two questions applied to you (and the magnitude of each). For you, I would suggest speaking with a tax planner or, at a minimum, manually calculate your expected 2021 CTC amount and compare that to the advanced monthly payment amount you are receiving. If in doubt, opt out.

 

If none of the questions above apply to you, the only other reason to opt out would be because you want to receive a larger refund when you file your 2021 return.

Mathematically, this doesn’t make any sense, as you are effectively giving the government an interest-free loan until you get your refund. However, if you are going to need the money for something in 2022, and don’t believe you (or your spouse) have enough discipline to save all of the monthly advanced payments, this is a very good reason to consider opting out. This doesn’t make you a bad person it’s an indication that your money habits are improving because you are aware of your tendencies and are putting a system in place to get out of your own way.

 

How to Opt out

If you want to opt out (even if you’ve already received some of the advanced payments), you can do so on the IRS’ CTC Portal. You can also use the portal to check your enrollment, view payments sent to you, and update your address and/or banking information. If you file MFJ, both spouses need to opt out (or the payments will only be reduced by 50%).

There are opt out/change deadlines for each monthly payment, which can be found here (see J2).

 

That’s a Wrap

I hope you’ve found this information helpful. If you’d like to learn more about what working with Traverse Planning can do for you, or would like to read more of our content, visit www.traverseplanning.com or give us a call at (303) 957-0307.

 

Ps. If you’ve found this helpful and know someone else that would benefit from this information, please forward this to them.

 

 

Note that this should not be construed as tax advice or relied on for tax preparation. There may also be some situations where the summary above doesn’t apply. Speak with your tax professional, or visit the IRS website, for more details and to see how this applies to your situation.

 

Source: IRS Website (as of 09/10/2021)