It is almost time! 9 days from now the IRS will open their E-file system for 2021 tax returns. In all of the chaos of the past two years, I thought it would be helpful to share some insights, small as they may be, into the world of tax filing during a pandemic and beyond. Today continues my 10 Day Countdown, check back each day for more tips and tricks.
Day 2: Miscalculations
Today, families around the country are readjusting their budgets to account for the end of the Advanced Child Tax Payments. The pandemic’s impact on our lives continues to be felt daily and the shift in what benefits are available can cause concern. There are a great deal of families who depend on receiving a tax refund to help sustain them throughout the year. This tax filing season, reconciling everything from the third stimulus payment to checking your W-4 will be imperative.
Let’s start with the third Economic Impact Payment, aka stimulus, we learned from the delays in receiving refunds for our 2020 returns how crucial having accurate information is. The 2021 tax return allows taxpayers to include any EIP not received on their tax return. A word of caution – having documentation of payments received will be necessary to ensure your return does not end up in the dreaded “process by hand” pile. Check back tomorrow for ways of getting this information if you have forgotten where your “safe place” to keep the documents happens to be.
At least the EIP reporting has prepared us for the reporting requirements of the Advanced Child Tax Credit payments. There are, of course, major differences between the two payments when it comes to how they impact your tax return. The Economic Impact Payments were issued without a claw-back provision. This means if the “stimulus” payment you received was more than you were eligible for it did not matter, the IRS would not require the money to be paid back. The ACTC is not so kind, but first let’s do a quick rundown of the changes of the credit for 2020.
#1 – The child tax credit amount has been increased and expanded. In non-IRS terms, the credit is larger, based on the age of the child, and extended to 17-year-olds who would have aged out during 2020.
For a child 0-5 $3,600 is available
For kids 6 – 17 $3,000 is available
This is an increase of $1,600 per younger child and $1,000 per older child, plus a $3,000 increase to 17-year-olds. These numbers almost made me consider having more kids, but don’t worry, I quickly came to my senses.
#2 – Half of the Child Tax Credit was to be paid out over the last six months of the year. Families with small children would receive $300 per child per month; Families with school aged children would receive $250 per child per month. The math breaks down as follows:
0 to 5 years; total CTC $3,600 – ACTC payments of $1,800 = $1,800 credit available on tax return
6 to 17; total CTC $3,000 – ACTC payments of $1,500 = $1,500 credit available on tax return
In general, there will only be a difference of $200-$500 in credit available compared to 2019 returns.
Stay with me here – this is where is gets “fun”
Remember in 2020 the IRS reset the withholding tables and completely changed the W-4? If you need a refresher, check out my post here. Ready? Great, hold on to your hats the numbers are coming.
In step three, you are given the opportunity to claim dependents. Since the personal exemption has been reduced to $0, the amount on this line is calculating your child tax credit. 2018 filing season was shocking to most people due to the efforts of the IRS to get our withholding closer to our actual amount owed to help eliminate large refunds. (Refresher here)
Have you caught on to the issue we may be facing yet?
The Tax Pro community was shocked when there was no discussion of changing the W-4 with the new ACTC payments going out because these payments do have to be paid back. So, if you completed your W-4 and listed $2,000 per child in step three you have already accounted for $2,000 of the child tax credit. No big deal, the credit is larger than it was last year. All true – until you factor in the advanced payments.
Child Tax Credit claimed on W-4 calculates as $2,000 that is not taxable (meaning not withheld)
Eligible Child Tax Credit in 2020 $3,000
Advanced Child Tax Credit received $1,500
Do you see it now?
Total Eligible Child Tax Credit $3,000
Amount Accounted for on W-4 and received via ACTC $3,500
While $500 may not seem like a lot, if you are expecting a credit of $1,500 the $2,000 swing can be quite shocking.
My word of advice here, take a deep breath and be prepared for some surprises. Be kind to your tax pro.
Check back tomorrow for tools at your disposal for gathering need information for your 2020 return.