The American Rescue Plan Act of 2021 increased the Child Tax Credit in 2021 for taxpayers whose income falls under a qualifying cutoff. The implementation calls for the IRS to send out monthly direct deposits/checks in advance so that you don’t have to adjust your withholding or wait until you file your tax return to get the money.
Because the IRS doesn’t know how much income you’ll have in 2021, they only use your income from the previous year to calculate your monthly payments. When you file your tax return, you re-calculate your child tax credit and you reconcile between what you should receive and what you actually received from the monthly payments.
The IRS already sent letters to people to notify them of the upcoming payments, which are scheduled to start on July 15. If you received the letter but you don’t think you will qualify for the child tax credit in 2021, the IRS provides an opt-out tool for you to tell them not to send the monthly payments. If you fall into this situation because you expect your 2021 income to be higher, you may be tempted to opt-out. Don’t do it.
I made this mistake when I enrolled in ACA health insurance for 2020. The ACA health insurance is set up similarly to the advance child tax credit in that the government can pay a subsidy to the insurance company in advance and you’ll reconcile on your tax return between what they paid during the year and what your income ends up qualifying for.
I refused the advance subsidy in 2020 thinking that I may not qualify for it in the end, and if I did qualify, I would just get it at tax time the following year. That refusal made me miss out on over $8,000 worth of tax credit when a new law enacted in 2021 made everyone keep the advance subsidy received in 2020 whether their income qualified for it or not. I had nothing to keep because I refused the advance subsidy.
Although right now there’s no law that says you’ll get to keep any advance credit that you don’t qualify for, you never know what will happen in the future. If you accept the advance payments, the worst case is that you’ll have to pay it all back, but you aren’t out anything because you already got the money in advance. If you opt-out of the advance payments and the government becomes extra generous, you’ll totally miss out on the generosity.
Most people will simply accept the advance payments. They are the mainstream. There’s safety in the mainstream. When the mainstream wins, you win. The mainstream won’t carry you if you try to be clever and step out of the mainstream. Don’t make the mistake I made in 2020. Go with the mainstream.
Last but not least, it isn’t easy to opt-out anyway. News reports said the opt-out tool requires hoops of ID verification. You have to verify your mobile phone number but that often doesn’t work. You have to upload a photo of your driver’s license but that often doesn’t work either. And if you’re married filing jointly, each of you has to go through the process separately. The easiest thing to do is simply not to go out of your way to opt-out. Do nothing. Accept the money. If it means you have to pay it back next year when you file your tax return, so be it.