The influx of federal money for pandemic relief was welcome last year, but it is causing disappointment and confusion as taxpayers prepare their 2021 returns. Many will receive smaller refunds than expected, according to tax preparers.
Under the US bailout passed last year, two types of payments ended up in many people’s mailboxes or bank accounts: the 2021 tax credit was enhanced and partially paid in advance to 36 million families. And 174 million families have received stimulus checks. Many families received both types of payments.
Tax preparers say they see a range of problems. Some people don’t realize they’ve already received direct deposited payments and won’t get full credit on their 2021 returns. Others who were due to pay advances haven’t received them. And yet others received a larger payment than they were entitled to. In the case of the child tax credit, any overpayment must be refunded to the government.
“A lot of taxpayers were under the impression that the Advanced Child Tax Credit was on top of the regular Child Tax Credit – that it was more free money from the government,” says expert Angela Anderson. -accountant based in Atlanta. “The rude awakening will be when they realize the Advance Child Tax Credit is what it sounds like – an advance, and it’s deducted from the total credit they can expect to receive.”
While the credits were to be automated unless taxpayers opted out, some taxpayers didn’t receive them and may not know how to claim them on their 2021 returns, says Mark Luscombe, tax attorney at Wolters Kluwer Tax and Accounting. .
Benefits were based on income reported on 2019 and 2020 tax returns. “Excluded persons are those who did not file a tax return during those years or who were not eligible but became eligible in 2021 – maybe their income has changed or they’ve had a child,” says Luscombe. the IRS used information from the Social Security Administration to track down low-income nonfilers, but many were likely overlooked, he says.
The IRS, so understaffed that it has asked taxpayers not to try to get help from an agent this year, is trying to help taxpayers by mailing out notices detailing precisely the amount they were paid.
Keep an eye out for letter 6419 with information on child tax credit advance payments and letter 6475 with stimulus amounts listed. Taxpayers can also create an account at irs.gov/account to view their records.
In the meantime, here’s a close look at the two forms of pandemic relief and their tax implications.
Advanced child tax credit
The U.S. bailout not only increased the child tax credit amount for many taxpayers, it instructed the Treasury Department to pay half the credit to families in advance monthly from July through December.
The credit was increased to $3,000, from $2,000 per child under 17 to an additional $600 per child under 6.
Taxpayers can take full advantage of the higher credit amounts if adjusted gross income is less than $150,000 for joint filers and less than $75,000 for single filers. The old $2,000 credit is available to couples earning less than $400,000 and singles earning less than $200,000.
Another change in the 2021 credit is that it’s refundable, meaning even taxpayers who don’t earn enough to file a tax return can claim the credit and it can be refunded. Normally, the child tax credit is non-refundable and can only be claimed on taxable income. If these people did not receive advance payments last year, they may not know that they can file a tax return and claim the child tax credit.
The reach of the credit was broad: More than 36 million families received payments averaging $423 to $444 per month, according to the Treasury.
The six monthly payments may have fluctuated, so don’t base your tax return on one month’s payment multiplied by six — you could be wrong, Luscombe says. “If the IRS was reviewing a 2019 return to determine what you were owed, but then obtained your 2020 return and the information was different, your payment may have been adjusted,” Luscombe says.
The bad news: Taxpayers who received advanced credits that weren’t owed to them — perhaps their child exceeded the credit in 2021, or their income increased — must repay it to the IRS either directly or through a reduction against a refund.
Those who were underpaid can claim the balance of their Child Tax Credit on their 2021 returns.
Salvage rebate credit
The recovery rebate credit is simpler. Co-filers earning less than $150,000 and singles earning less than $75,000 are eligible for a per person credit of $1,400. A single person can claim $1,400; a couple with two dependents, with no age limit, can claim $5,600.
Most eligible taxpayers received the full amount of their credit last year, either directly deposited into their bank account or by mailed check. Any discrepancy between the amount owed and the amount received can be claimed on a 2021 return.
But be very careful, says Anderson. “Unfortunately there were a lot of mistakes made when sending the reminder. It was being sent to people who were no longer living, formerly married now divorced couples, for example.
The good news is that taxpayers who received more stimulus money than they were eligible for are not required to repay the excess to the government.
Another word of warning: Some 2020 stimulus payments didn’t land in taxpayers’ bank accounts or mailboxes until early 2021. Don’t confuse them with 2021 payments, Luscombe says.
“When you subtract what you received to find what you can claim, it can get confusing,” he says. “Also, this year’s credit can be claimed for aging dependent relatives, so taxpayers need to be careful about that – make sure they’ve received those payments.”
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