It seems that every year when we file tax returns, there is some change, new rule, or new guidance, that causes problems for some taxpayers. Remember a few years ago when tax withholding tables were calculated incorrectly and many taxpayers saw significantly smaller refunds, or even owed tax with their return. Last year, it was those stimulus payments. Did you get both payments? Did you get the full amount you were entitled to? And there was a third payment. We have to deal with that one on the 2021 return. Hopefully, figuring that out won’t cause too much pain. However, if you have children under age 18, you probably received some unexpected money from the IRS in the last half of 2021, and it could cause some pain at tax time.
I discussed in my prior article how the credit is calculated and how it is reported on your 2021 tax return. This week I want to talk about a couple of potential problems that these payments could cause.
The IRS has sent out Letter 6419 to all taxpayers that received these advance payments. Please keep this letter with your tax records, but you should check it to make sure it correctly reports the amount of payments you received. The IRS recently admitted that taxpayers that moved or changed bank accounts may not have received all of the payments they were entitled to, and the letter may incorrectly report the amount they received. You can access your IRS account through the IRS website, and you can verify the amount you received there. The website should be more accurate than the letter.
When you file your 2021 tax return, you will calculate the correct amount of Child Tax Credit you’re eligible for, and you will reduce the credit by the advance payments you’ve received. What if you’ve received more in advance payments than the credit you’re entitled to? In some circumstances, you’ll have to pay back the overpayment, but some taxpayers qualify for repayment protection, and they’ll be allowed to keep the overpayment. Repayment protection is based on your income and other factors, which will need to be considered when you file your tax return.
While everyone is different, I find that most taxpayers want to and expect to receive a refund when they file their return. In general, everyone even has an expected refund amount, and if their refund is different, they want to know why. If the refund is more than expected, a simple explanation generally is sufficient. If the refund is smaller than expected, or if they owe when they expected a refund, that can cause some real concern.
Even if these advance Child Tax Credit payments work out as expected, your refund can still be smaller than expected. Consider a taxpayer with one eligible child. Previously, this child made you eligible for a $2,000 tax credit. For 2021, the tax credit increased to $3,000, but the taxpayer received $1,500 in advance payments, so on the return, the credit will be $1,500 instead of the previous $2,000. All things being equal, the refund is reduced by $500. Granted, the taxpayer received $1,500 in payments in advance, but you may not remember that as you file your tax return.
In some cases, taxpayers could owe the IRS instead of getting a refund, and that can be financially difficult. Please remember a few things. First, no matter when you file your tax return, any balance due is not due until the due date of the return, which is April 18th for 2021 returns. Second, the IRS is very understanding in these situations, and it is generally very easy to set up a payment plan. Fees apply, but if you need more time, you can generally set up a payment plan in minutes on the IRS website. Last, don’t delay filing your return just because you owe tax. File your return timely and set up a payment plan if needed. The penalties for late filing are much more than those for paying late.
I hope I’m wrong and these advance payments don’t cause heartache for many taxpayers. However, if you have questions about anything related to the advance payments or the credit, please contact our office. As always, I am looking for article ideas that you would like me to cover. If you have an idea for a future article, or just have a topic you would like more information on, please send me an email.
At Faw & Associates, we are always available to answer any of your tax or financial planning questions. You can get more information on this or many other topics calling our office at (336) 838-3080. You can also email me at jim@fawandassociates.com any time with your question or concern.