If you received monthly advance child tax credit payments in 2021, you may be in for an unpleasant surprise this filing season.
Some families may not only receive a smaller tax return than last year, they may even find themselves repaying credits that were advanced in the last half of 2021.
If you received monthly advance child tax credit payments last year, there is a high probability that your 2021 tax refund will be different than your 2020 tax refund. And that shift is due to The American Rescue Plan that was enacted last March.
The American Rescue Plan increased the tax credit from $2,000 to $3,000 for every child under the age of 18, and added an additional $600 credit for every child under the age of 6.
As we’ve addressed in past articles, the challenge with the new law is the way it was enacted. Millions of families received half of this credit between July and December of last year. This pre-paid credit will not only reduce your tax return this year, it could also trigger a tax bill, depending on your 2021 income.
While some families could be in for an unpleasant surprise, the complexity of the calculation makes it difficult for most families to calculate on their own.
The Eligibility of the Child Tax Credit
In 2021, most families received between $1,500 and $1,800 in advanced monthly payments for every child under the age of 17. These payments began in July and terminated in December. And the eligibility of these payments was based on your 2020 taxable income.
However, some families were struggling on unemployment or experienced reduced paychecks due to the pandemic in 2020; so the income number that the IRS used to calculate their eligibility was temporarily lower than normal. As the economy returned to full steam in 2021, and people went back to work, some families earned more in 2021 than they earned in 2020. The result of the increased income could reduce or completely eliminate the enhanced benefits of the Child Tax Credit.
If there is a big swing between your 2020 income and your 2021 income, be prepared to pay back some of the advances you received last year. For single parents the phase-out for the increase child tax credits begins at $75,000 of income. For married couples filing a joint return, the phaseout begins at $150,000 of income.
A couple with 3 children ages 8, 10, and 12 that saw their Adjusted Gross Income drop below $150,000 due to a loss in employment in 2020 would have received $4,500 in advance child tax credit payments in 2021.
They would have received $750/month from July through December.
When their Adjusted Gross Income in 2021 increased to $210,000 due to both spouses being employed, their actual credit will have dropped to $1,500.
Since they had already received $4,500 last year, the net result will have their tax refund shrinking (or worse yet—their balance due growing) by $4,500 from the prior year’s return.
In essence, this couple was advanced more money from the IRS than they should have received due to their increased income.
Letter 6419 From the IRS
The IRS started mailing copies of Letter 6419 in early January. This letter covered the total advance child tax credit payments received in 2021 along with the number of qualifying children used to make the calculation.
Do not throw this letter away, as it will help us verify the information needed to accurately file your 2021 tax return. Also keep in mind that each spouse should receive a letter, so be sure to provide both letters when submitting your documents if you are married and filing a joint return.
As we’ve shared in the past, the IRS continues to struggle with extraordinary delays that have yet to be resolved from last year’s tax season. With 17.6 million returns that have yet to be processed as of early February, we expect these delays to continue and possibly get worse.
To reduce delays with your 2021 tax return, make sure that the payments you received last year match what the IRS reports on Letter 6419. To the extent possible, we want to reconcile the advance child tax credit payments so that the IRS passes your return through their automated process so you get your refund as soon as possible. If there is a mis-match between what you received and what’s on your letter, be prepared to wait six to nine months for your return to be processed by the IRS.
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