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Advanced Child Tax Credit Payments 2021: Should Your Client Opt-Out?

The IRS sent the first advanced monthly payment of the Child Tax Credit to roughly 35 million U.S. families with 60 million children on July 15. The first batch of payments totaling $15 billion paid as much as $300 per child.  

If your clients didn’t opt-out of the advanced monthly payments by August 2, they’re likely to get the August 13 and the September 15 payments. Should your client opt-out?

Why Should my client OPT OUT?

We need to get our talking points straight, because we may be hearing from many angry clients once the 2022 tax filing season begins. Clients who expect their usual big tax refund and end up with a smaller amount, or even owe money to the IRS, are going to yell at us, the people who prepared their tax return, not the people who wrote the law.

Let your clients know the IRS has been clear that this is an advance payment, not a “gift” from the government. If the monthly advance is too big, it must be paid back when their 2021 tax return is filed. Clients can opt-out of the advance. If they opt-out, they are not turning down the credit, but putting off when they’ll receive it in advance payment amounts that the IRS approximated (right or wrong) from prior year information, or in an amount correct calculated on their 2021 tax return.

This PDF guide, created by the IRS for taxpayers, is available with online tools and which one is may be right for your client.

Three reasons to tell your clients why they should opt-out

Here are 3 cases where unenrolling from the advanced payments may be advisable:

  1.  The client’s 2021 income will be above the thresholds ($75,000, $112,500, $150,000), and the client doesn’t want to repay the advance.
  2. The client’s financial situation is solid. “I don’t need the money. I’d rather have a bigger refund next April.”
  3. The client’s circumstances or tax situation will change (or has changed) this year, and they don’t want the hassle of updating the IRS portal. Think divorced clients with alternating custody of their child. 

If it turns out your clients were overpaid or underpaid during the six-month prepayment period, they will have to take the advance payments into account on their tax return at the end of the year. If they’re underpaid because they had a baby or their income dropped, they’ll get a bigger amount when the tax return is filed. 

If they were overpaid, they must pay the overpayment back. This is different from what happened on the Economic Impact Payments (EIPs). If the client was overpaid, they could keep the EIP overpayment. If they were underpaid, the client could claim an excess credit when reconciling the EIP on their tax return. The Child Tax Credit Advance is not the same — overpayments must be paid back.

how do your clients opt-out of the September payment and beyond?

Your clients have until 9 p.m. PT on August 30 to unenroll and opt-out. They can opt-out anytime in 2021 to halt the rest of the advanced payments even if they’ve already received payment.

If your clients are married and filing jointly, they will need to individually opt-out because unenrolling applies to one person at a time. The IRS said if only one person opts out, they’ll get half the joint payment.

Note: The IRS said to unenroll, your clients must opt-out three days before the first Thursday of the month to halt the next month’s payment. See the chart below for more information. 

How to Instructions:

  1. Go to the new Child Tax Credit Update Portal and click the Manage Advance Payments button.
  2. On the next page, they need to sign in using their IRS or ID.me account. If they have neither, the page will walk them through setting up an ID.me account. They’ll need an email address, a photo ID, their Social Security number, and a smartphone or tablet to verify their identity.
  3. On the next page, they can see their eligibility and unenroll from the monthly payments.

Tax Practitioner Tips

Your clients may mix up the Economic Income Payments with the Child Tax Credit Advances. No one likes paying back excess credits. To reduce the frustration, consider this tip for the next “thrilling” tax season.

  • Tell them to keep their end-of-year reconciliation letter.
  • The IRS will not issue a Form 1099 (or any other information form) to taxpayers.
  • The IRS will mail out Letter 6419 in January 2022, which will say the amount of advance CTC payments paid in 2021.

Looking for more information? Follow Sharon Kreider, CPA at Western CPE, for updates and insightful tax analysis.