How these baby tax credit score checks might have an effect on your tax refund this 12 months
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If you have received monthly child tax credits in advance in 2021, there may be a costly surprise on your tax return.
The American Rescue Plan, passed last March, increased the tax credit from $2,000 per child under age 17 to $3,000, with $600 more for children under 6.
Millions of families received monthly prepayments, reducing their depreciation at tax time, which may trigger a bill in 2021 depending on their modified adjusted gross income.
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“It’s definitely going to come as a surprise to people,” said certified financial planner Patrick Amey, a consultant at Financial Advisory Service, Inc. in Overland Park, Kansas.
“And you won’t know exactly where you fall until you actually file your taxes, given the complexity of the calculation,” he said.
Entitlement to child allowance
In 2021, you may have received up to $1,800 in monthly payments per child ages 5 and younger, and up to $1,500 for children ages 6 to 17, based on 2019 or 2020 income.
Given the pandemic-related job losses and business revenue decline in 2020, you may have earned more in 2021, potentially reducing or eliminating entitlement to the increased benefit.
“This is going to be a huge shock to a lot of people,” said Dan Herron, a San Luis Obispo, Calif.-based CFP and CPA at Elemental Wealth Advisors. “Especially with a big swing between 2020 and 2021 earnings.”
There are two expirations for the child tax credit, reducing eligibility for the 2021 increases and the $2,000 base amount of the credit.
The first starts above $75,000 for single parents or $150,000 for joint applicants, and the second begins once modified adjusted gross income exceeds $200,000 for single parents and $400,000 for couples applying together.
With multiple steps, it’s not a simple calculation, Herron said. But you can start comparing bank statements to IRS filings and work with a tax accountant to estimate your income.
Look for letter 6419
The IRS began sending out copies of Letter 6419 in late December, covering total child tax credit advance payments received in 2021 and the number of eligible children used to calculate the amounts.
“Keep an eye out for this letter and don’t throw it out,” Herron said, stressing how it will make tax returns easier to file.
Letter 6419 should match the information on the Child Tax Credit Update Portal. However, a couple who apply together may both need to reconcile their payments, Herron said.
The reconciliation of advance payments for the child tax credit may also cause delays in IRS refunds, similar to what happened in 2020, experts say.
As of December 18, there were still 6.3 million unprocessed returns, including 2020 filings with stimulus check errors, according to the IRS.
“This is going to get worse,” said Tommy Lucas, a CFP and registered agent at Moisand Fitzgerald Tamayo in Orlando, Fla.
However, you can make sure your payments match what the IRS reports in letter 6419 or on the portal, he suggests, and provide as much information as possible to your accountant.
It’s better to find out sooner than later if you need to pay back some or all of the child tax credit, Lucas said.
“You can adjust spending between now and April to reflect that,” he said.
(Correction: Tommy Lucas is a certified financial planner and an enrolled agent with Moisand Fitzgerald Tamayo. His name was misspelled in an earlier version.)