Child Tax Credit: Here's why you may want to opt out of monthly payments

SAN FRANCISCO (KGO) -- Millions of parents found more money in their bank accounts this week as those extra Child Tax Credits rolled in.

However, tax experts warn some parents may actually want to opt out of getting this extra money.

It seems absurd. Why would anyone turn down "free" money? As it turns out, the IRS is sending payments based on 2020 income. But if you earn more this year than you did last year, you may end up having to pay back all that money.

"That will make a big difference. I need childcare now, not next year during tax season," said Donnise Powell, a Fremont mom.

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"This is a huge boon. It will help families get through this really tough economic time," said Amie Latterman of the Children's Council.

The enhanced Child Tax Credit is helping millions of families struggling through the economic downturn.

It provides up to $3,600 per year for each child under age 6, and $3,000 for each child 6 to 17 years old.

The IRS began automatically depositing money into bank accounts of millions of families last week. However, tax experts warn many parents may wind up having to pay some or all of it back.

RELATED: First child tax credit payments have been sent: Here's what you need to know

"If you know now that your income is gonna be higher in 2021, and you don't want to have a surprise next year when you file your return and have to pay it back, you may want to consider opting out and just waiting for the credit," said Norman Golden, an enrolled agent with Golden Tax.

Here's why: parents are getting paid based on their income in 2020, when many were out of work.

But the actual credit will be based on this year's income, when many returned to work and are earning more.

"This is very confusing to the American taxpayer, so I don't blame them for being lost as to what to do," Golden said.

RELATED: Most families with kids to receive thousands of dollars

Married couples will get the full credit if they earn less than $150,000 during 2021.

A single head of household can earn up to $112,500.

The credit phases out gradually for those earning more.

So parents may be getting more money now than they can claim next year.

"If they qualify for the credit now, but their income goes up because they're now going back to work, or maybe you got a raise... Or other items of income, such as capital gains, your income may increase to the point where you no longer qualify for that credit. You'll have to pay it back to the IRS," said Golden.

If you're worried about the surprise tax bill, experts say set aside those advance payments... and it's not too late to opt out of getting them. You can opt out and still claim the credit next year when you're more sure of your income.

Take a look at more stories and videos by Michael Finney and 7 On Your Side.

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