Advance payments for the extended child tax credit start on July 15.
The American Rescue Plan has increased the Child Tax Credit (or CTC) to $ 3,000 per Eligible Child 6-17 years of age or younger (eligibility for an additional year) and increased the credit to $ 3,600 per Eligible Child under 6 years of age for . only increases in tax year 2021 (income limits apply). The new legislation also made up to half the loan available in advance of up to $ 250 per month (or $ 300 per month for younger children). Many questions remain unanswered in a month before the prepayments land in taxpayers’ bank accounts and mailboxes.
For example, recently divorced taxpayers and taxpayers who switch custody of their children every two years for tax reasons (and their tax professionals) wonder how the IRS will determine which parent should receive the payments. The IRS has stated that it will use information from the taxpayer’s 2020 income tax return to determine eligibility (or 2019 if the 2020 return has not yet been filed), but tax practitioners predict chaos when it comes to taxpayers who divorced in 2021 and those who switch custody. ShawnToya Jones, owner of ACT Now Financial Services in the Jacksonville, Fla. Area, says she has been answering questions from confused taxpayers for weeks. For example, customers have asked if the advance payments will be used to offset child support, if the payments are diverted as they are offset to the taxpayer, the taxpayer will receive advance payments even if they do not claim the child for the 2021 tax year and whether it is possible for both unmarried parents to receive the advance payments (ie, the advance payments can be “doubled”).
With regard to double dipping, Jones has some advice: “Stop trying to play the system.” She recommends customers use their children under their custody arrangements and, if the parents have a good relationship, simply split or even split the payments Increase refunds after filing the 2021 tax return. Of course, she is aware that this is not always possible. Still, she is in the difficult position of answering questions about pending (or paid) tax returns for taxpayers who may or may not use her services in the next filing season. Referring these taxpayers to the IRS website is of limited use because so many customers cannot or will not read the information (or if they do not fully understand it).
The IRS recently started sending letters to taxpayers who may be eligible for the CTC’s advance payments. Anna Ortiz, CPA owner of Massachusetts-based North Shore Accounting Services, received her own letter earlier this month. The letter states that a portal for tax returns will open at the end of June. Rumor has it that the registration portal will go online on July 1st. Taxpayers have approximately two weeks to make adjustments before their prepayments begin. Depending on the number of taxpayers who need to make adjustments, this may or may not be enough. Tax professionals are hoping for the best but preparing for the worst – another wave of reasonably frantic phone calls from frustrated customers and a potential crash of the portal.
In addition, some eligible taxpayers may not have received a letter informing them of their eligibility for the advance payments. The IRS always encourages taxpayers to keep their mailing addresses updated. If not, the IRS will use the address on the most recently filed tax return (2019 or 2020) as the “last known address” for mailing letters and checks or debit cards to eligible taxpayers. But what happens if the taxpayer has moved since the last tax return? Typically, a taxpayer would file Form 8822 (Change of Address), but this form must be sent to the IRS for processing. Despite Commissioner Rettig’s claims that the mail jam has been cleared, industry officials know that there is a huge difference between mail opened and mail processed. As a result, if you file an 8822 now, the advance payments are unlikely to go to the new address, at least not at first, possibly never.
The fastest and safest way to receive payments is by direct deposit. However, if a taxpayer has switched banks or the IRS does not have banking information on the file, taxpayers must provide that information to the IRS. Today the IRS added a non-filer portal (similar to the one for economic impact payments) that allows taxpayers to provide updated information on how to receive their prepayments. Phyllis Jo Kubey, a registered agent in New York, New York, warns taxpayers who have not yet filed their tax return but must do so not to use the non-filing tool because “using this tool creates a simple tax return becomes. and if you try to file your actual return, you must file an amended return. ”The IRS website advises taxpayers who have filed or need to file an income tax return for 2019 or 2020 to“ Look later for tools to help you Check your eligibility and manage and unsubscribe payments ”.
Why should a taxpayer opt out of prepayments? Because for many taxpayers with children, the CTC is tax offsetted and sometimes refunded. Many taxpayers prefer to receive the credit as a large lump sum on their annual tax return. Others rely on it to offset their income taxes; they use it as a credit for taxes they owe in addition to their withholding. Next year tax professionals expect an answer, “Why is my refund lower?” or worse: “Why do I owe what?” Questions from customers who have not objected to the prepayments. For example, a family with two children ages 6-17 and below the run-off area typically receives $ 4,000 in child tax credits on their tax return. The credits would be applied to any taxes remaining due, after withholding and estimated payments, and the remainder would be refunded. If the same taxpayers are eligible for $ 6,000 credits but don’t refuse the prepayments, they will get $ 3,000 upfront and the other $ 3,000 when they file their tax return. For tax professionals, the IRS, and Congress, that looks like an additional $ 2,000 for taxpayers. For many taxpayers, however, it will look like a $ 1,000 cut in their refunds. Tax professionals want to be able to advise clients on whether it is best to decline the advances, but without the means to do so (the portal) the advice is useless. Jones expressed additional concern that tax professionals are being re-thrown into the role of technical support for the portal, answering customers’ questions about how to find the portal, how to use it, and how to fix bugs or issues.
The expansion of the CTC aims to lift millions of children out of poverty. The prepayments will be of great benefit to the families in need of the loan most. However, for some families, prepayments could be an issue in the next sign-up season. Taxpayers may have to repay advances in the event of a change in income or other changes (divorce). Additionally, the prepayments add another line item that needs to be matched on Form 1040, adding complexity for do-it-yourself applicants and costs for those who hire a tax advisor. Taxpayers who have questions about prepayments should carefully review the information the IRS provides on their website or consult their tax advisor (and be prepared to pay for advice).
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