For many it was a welcome surprise. On July 15, the money poured into parents’ bank accounts across the US as the government rolled out the first monthly payments of the increased child tax credit approved by Congress this spring.
But as helpful as those payments are for many families, they can be a headache for others, with some people owing money to the government next year.
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As a result, some parents have already opted out of the monthly payments and instead opt to receive the full credit when they file their tax returns next year.
Keep in mind that the Internal Revenue Service makes these payments based on your latest tax return. It is the government’s best estimate of what your family owes. Half of the tax credit is now paid monthly until December. You then claim the rest next year when you file a tax return.
But a lot can change from year to year.
So you may end up with more money in those monthly payments than you owe, and you’ll have to pay some, if not all, back to the government when you file your tax returns next year.
An exception to this: If you earn less than $40,000 as a single applicant, $50,000 as a householder, or $60,000 for married couples filing jointly, you won’t have to refund any of the money, even if it was overpaid.
Here’s how to decide what makes sense for you.
Who should opt out of the monthly payments?
First, if you just prefer a big tax break in the spring, as always, opting out might be for you. You may always count on the child discount to settle the tax due. Or maybe you’re looking forward to getting a big refund every spring.
Saby Montoya is in that camp. She stopped making monthly payments after being surprised by the first one.
“With the large bulk amount, it just makes for a lot more stuff,” says Montoya, who has a 12-year-old son.
She uses her tax refund to pay bills, pay for her son’s classes, and celebrate his birthday, among other things.
But there may be other more pressing reasons to opt out.
LuSundra Everett, owner of Everett Tax Solutions and a registered agent, suggests thinking ahead about what your 2021 tax return will look like. If you expect major changes from 2020, consider stopping monthly payments now. For example:
1. Your income has increased significantly in 2021.
Many people suffered a blow to their income in 2020 due to the pandemic. Maybe you stopped working for a while, or you had to implement a significant salary cut. If your family’s income is restored in 2021, leaving you more than $75,000 for single filers, $112,500 for householder, or $150,000 for married couples filing jointly, your child tax credit will begin to phase out.
But the IRS isn’t aware of this increase in income yet, and so the advances deposited into your bank account each month may be overpayment.
“If you don’t want to be in a position where you have to pay back money, the safest thing to do is unsubscribe,” says Everett.
2. You are divorced and take turns taking credit.
Everett uses the example of parents she mentions Mary and Bob, who are divorced and have a child.
If Bob claimed the child on his 2020 tax return, he would have automatically started receiving the monthly payments on July 15th. But Bob isn’t going to claim the kid on his 2021 tax return because it’s Mary’s turn.
So in the end Bob owes the government all the money he got through the monthly payments. Mary, meanwhile, has not received the monthly payments, so she gets the full tax credit as a lump sum when she does her tax return.
3. Your child is now officially an adult!
The 2021 child tax credit covers children from birth to 18 years. If your child turns 18 in 2021 (even on December 31, 2021), he or she will not be eligible for the discount. The IRS should have taken this into account when estimating the amount of your monthly payment, but it’s best to double check.
If you accidentally receive monthly payments for that child, you must repay the money.
Likewise, if you have a child turning 6 this year, you may want to double check that the monthly payment you are getting for that child is correct. The 2021 credit offers up to $300 per month for children under 6 and up to $250 per month for children aged 6 to 17.
Okay, I’ve decided to unsubscribe. How do I do it?
The IRS has made a website for managing your monthly payments. To stop the payments, you need to create an account with the IRS using a third-party app called ID.me. Note: they are not the most user-friendly apps. You must verify your identity by scanning a government ID and your face. Prepare to be patient.
You can also unsubscribe by telephone, but this may require even more patience.
An important note: If you are married and applying together, both parents must opt out. If only one parent opts out of the monthly payments, you will still get half of the amount deposited into your bank account.
Every month until December you have the option to unsubscribe before the next payment comes in. The deadline is three days before the first Thursday of each month.
SARAH MCCAMMON, HOST:
Many parents across the US saw hundreds of dollars land in their bank accounts earlier this month, the first monthly payment of the expanded child tax credit. But not every parent wants that money. And some get out. NPR’s Andrea Hsu is here to tell you why. Good morning, Andrew.
ANDREA HSU, BYLINE: Good morning, Sarah.
MCCAMMON: So what’s going on? Why are people shutting this down?
HSU: Well, to be clear, they don’t refuse the money. It’s about when they get the money. And for some people, getting it now may not be to their advantage. So, you know, in the past, the child rebate came as a lump sum when you filed your taxes. It can help to offset what you owe. Or if you didn’t owe any taxes, you got a nice, big refund. For 2021, the government said, hey, we’re going to give parents half of the credit this year and the other half next year when you file your tax returns. And half of this year goes to the parents in the form of these monthly payments. The next one will come in mid-August. And if you want to stop that payment, you must unsubscribe by Monday at the latest.
MCCAMMON: What if you listen to this and think, is this a good idea for me? Why would anyone unsubscribe?
HSU: Well, some people just like getting a big check in the spring. Take Saby Montoya. She is the mother of a 12 year old boy. Every spring, she looks forward to a large repayment, which she uses to pay bills or pay for her son’s classes. Sometimes she does something nice for his birthday. So she chose to quit after being surprised by the first monthly payment.
SABY MONTOYA: I didn’t want to keep getting it, and then in March, April, I do my taxes and then I don’t get what I normally get in return.
HSU: But there’s another important reason why some people should opt out, Sarah. The money the government is sending now is their best estimate of how much your family owes. And that on the basis of your most recent tax return.
MCCAMMON: So it’s an estimate. It could be wrong. What would that mean for families at tax time next year?
HSU: Yes, it can be too much. And that can be a problem. I spoke to LuSundra Everett of Everett Tax Solutions about this. Her advice is to think about what your return in 2021 will look like. And if there are major changes, consider forgoing the monthly payments.
LUSUNDRA EVERETT: You know, if you don’t want to be in a position where you have to pay back money, the safest thing to do is unsubscribe.
HSU: So an example of this would be people whose earnings went up a lot last year. This could be true for many people who have been out of work for part of 2020 due to the pandemic. Maybe they went back to work this year or got a new job. Well, the child tax credit starts to be phased out when you reach a certain income level. But the IRS doesn’t know yet that you’ll be earning more in 2021. So they still assume that you are eligible for the full credit. And you may have to pay back some of it.
MCCAMMON: Okay. So that’s one scenario. Are there any other situations you can think of, Andrea, where people might want to opt out of this child discount?
HSU: Yes. Well, another one is specifically for divorced parents who take turns claiming the kids. Whoever claimed last year has probably already started receiving the monthly payments. So if that parent isn’t going to file a claim this year, they should unsubscribe now.
MCCAMMON: And how does the age limit work? Who is considered an eligible child for these purposes?
HSU: So any child from birth to 17 is eligible. If your child turns 18 in 2021, they will not be eligible. Now, if your child turns six this year, the credit amount actually drops a bit. The IRS told me that the monthly payments going out should reflect how old your children are. But if you have one turning six or 18 this year, you might want to double check how much you got in the first payment.
MCCAMMON: And very quickly, if you want to unsubscribe, how do you do that?
HSU: Well, it’s a little complicated. You go to the website of the tax authorities. Just Google IRS tax credit for children. You will see a button called manage payments. Then you have to create this account on this app. You need to scan an ID and also scan your face. It’s a bit glitchy, so you have to be patient. But here’s something else. If you are married and filing a tax return together, both parents must deregister. If only one parent does it, you still get half the payment. And don’t forget to register for Monday if you don’t want the August one.
MCCAMMON: Good. That’s Andrea Hsu from NPR. Thank you.
HSU: Thanks, Sarah. Transcript provided by NPR, Copyright NPR.