The first installment of the expanded child tax credit will start to hit the bank accounts of eligible recipients later this week. This coronavirus stimulus check could prove extremely important for some families, but for some, it would be beneficial to opt out of the child tax credit (CTC).
Opting out here doesn’t mean that you will have to give up the child tax credit. Rather, it means that instead of getting a monthly payment (and balance at the time of filing a tax return next year), you will get a full lump sum after you file the tax return next year.
Moreover, in certain scenarios, it could be beneficial for recipients to opt out of the child tax credit. The first reason why you should opt out is if you don’t immediately need the money. This way, you will get the money in one lump sum.
Another, more important reason to opt out is to ensure that you don’t end up owing the IRS next year. This could happen if you are making more money this year than you did on your last tax return.
Generally, a recipient gets the child tax credit at the time of filing a tax return. However, considering the current situation, the CTC due with the 2021 tax return has been split in half. The recipients will get the first half by way of monthly installments through December, and the other half, they will get when they file their tax return next year.
So, the IRS is using your latest tax return to determine your monthly payment for the CTC. After you file your 2021 tax return, the IRS will determine your balance amount. Thus, if you got paid more via monthly installments, then it is possible the credit you get next year is reduced.
Why you may have to return credit back
In certain cases, it is also possible that the recipients may have to pay some money back to the IRS. This, as said above, could happen if you are making more money this year compared to last year.
One more reason why you would have to return the money is if your child was 17 years of age at the time of the last tax return, but turned 18 this year. In this case, you won’t be eligible for the CTC, but you will still get the payment on the basis of your last tax return. So, you will have to return it back next year.
So, these are some crucial reasons why you may want to opt out of the child tax credit. However, you can’t opt out of the first payment now because the deadline to opt out for the first installment is already over. The next deadline to opt out is August 2. A point to note is that once you opt out, you can’t opt back in.