With tax season opening and the IRS accepting returns this week, I figured it is timely to talk through some of the most common situations and questions I have been running into as an Enrolled Agent. Let’s get right into it.
Question 1: Stimulus payment
Remember when you got that stimulus payment from the IRS sometime in March last year? Me neither. But, you’ll have to dig up the amount to see if you qualify for any more of the payment this year, assuming you got less than $1,400. Here are a few typical questions on the stimulus payments:
- Is this taxable income? No, it is not reported as income but a refundable credit, which means it lowers your tax liability or increases your tax refund, dollar for dollar. If you received the full amount, there will be no effect on your return.
- What if I didn’t get the full amount? The distributed payments were based on your last filed tax return (either 2019 or 2020, depending on when you filed your 2020 return), but the amount of the actual credit is based on your 2021 taxes. If your 2021 tax return has a lower adjusted gross income than the return that your payment was based on, which subsequently makes you eligible for the full payment (or a bigger payment than you received), you will report the difference via the Recovery Rebate Credit, which will be added to your refund (or lower your tax due).
- I made MORE money in 2021; do I have to pay it back? Nope, there is no claw back.
Since this was at the beginning of the year, and there has been a lot of confusion around when and how much was received, here are some tips for finding how much you received:
Wait for Letter 6475 which the IRS is sending to report how much was paid to you.
Look for a direct deposit from the IRS last year. It could have been paid anytime after March - make sure you’re not reporting your 2020 tax refund.
Create an IRS account, toggle to the “Tax Records” tab, and scroll down to the bottom to find “Economic Impact Payment Information”.
Finally, the question I love to answer: if I had a child in 2021 after the third stimulus was sent, do I get to claim a credit for that child? Yes :)
Question 2: Advance Child Tax Credit
These advance payments were amazing for many people and I love them for that… but they are also complicated, and I hate them for that.
Here are some of the important things to know about the payments / credit:
Similar to the stimulus, these were credits that were paid based on your most recent filed tax return. The actual credit will be based on your 2021 income, so some adjustments may need to be made when reporting the credit on your tax return. Here are some common questions:
- Is this taxable income? Similar to the stimulus, no. These were advance payments of your Child Tax Credit.
- How much will I get? The Child Tax Credit was enhanced this year from $2k per child to $3,600 for each child 5 and under, and $3,000 for each child ages 6 - 17. The amount you receive may be different if your income is higher. The advance payments started in July and should have been half of what you were eligible for (based on the last tax return filed) over the last six months of 2021.
- What if I didn’t get the full amount, or anything? You’ll reconcile this on your 2021 tax return and get the full credit you’re eligible for.
- How much money did I have to make to result in a lower credit? This gets complicated. There are two income levels that could affect your Child Tax Credit (CTC). The first is $75k if single and $150k if Married Filing Jointly. If your income is below this, you get the full enhanced credit. If your income is above this, the enhanced CTC will start to decrease (based on how much income you report) until the credit decreases to the standard $2k Child Tax Credit from prior years. If your income is above $200k if single and $400k if Married Filing Jointly, then the standard $2k credit will begin to decrease as well and could potentially be $0 - this is unchanged from prior years.
- If I received the advance payments, but I will not be claiming my child this year, do I have to pay it back? Maybe. If you made more than $40k single, $50k Head of Household or $60k Married Filing Jointly, some, or all, of the advance payments will have to be paid back. The pay-back amount will show as an extra tax due on your tax return to either increase your owed tax or lower your refund, dollar for dollar.
Finally, one of THE BIGGEST MISTAKES I SEE TIME AND TIME AGAIN: If you had a child late in the year, let's say in December. Your tax software will ask “how many months did the child live with you?”. You should answer: 12 months. If you answer one month, it will give you the wrong credit, which will be $500 as opposed to the right credit for $3,600 - this is a $3,100 mistake in 2021. The correct answer is really “my child lived with me all year”, but usually the only option in the tax software is 12 months, so use that.
That is right - if you're within the income limits and had a child in December 2021, you'll get an extra $1,400 Recovery Rebate Credit and $3,600 enhanced CTC, which is a nice little $5k bonus in your refund. Boo yah.
Question 3: Who claims our child if we’re unmarried?
There is no such thing as joint custody in the eyes of the IRS - you’ll have to figure out who claims your child. Unfortunately (or, fortunately?) it is not a choice.
The person who claims the child is the custodial parent, which the IRS defines as the parent whom the child lived with the most throughout the year. In other words, if your child lived with you more than half of the year, you claim them.
If the child splits time perfectly in the middle, then the parent with the higher adjusted gross income can claim the child.
The only time there is a choice is if the (unmarried) co-parents live together and you’re both supporting your child. This is a situation where you can choose who will claim the child, and likely want to choose based on what brings you the highest refund between the both of you.
To make this as clear as mud, there is one final exception. Due to a divorce decree or other reason, the custodial parent can allow the noncustodial parent to claim a child for purposes of the CTC by signing Form 8332. In this situation, you still want to report your child on your tax return if you are supporting them! This will allow you to still claim a Head of Household status as well as be eligible for other child related tax credits (Earned Income Tax Credit and Dependent Care Tax Credit). Form 8332 only transfers the Child Tax Credit to the noncustodial parent - nothing else.
Question 4: Why is my refund so low?
If I had a dollar for every time I heard this, I might have, like, almost a hundred dollars which would be pretty cool.
But, I do hear this a lot relative to the amount of tax questions I get.
It is hard for me to answer this one - there has to be some basis behind why your expectations were different from reality. A refund is typically the amount you overpaid the government throughout the year - so if you got a lower refund, maybe you didn’t pay as much to the IRS as you thought.
Or, if you expected the same refund as last year, you’ll have to compare side by side to see what is different and why your refund is lower.
Finally, I am seeing this a lot with the Child Tax Credit. Those with children typically get $2k added to their refund for each child (via the CTC). But this year, if they are eligible for $3k, they likely already received half of it throughout the year. That means they can claim an extra $1.5k on their tax return, which is $500 less for each child than what they are used to receiving each year. Just remember, that is because you already received part of your refund over the last six months of 2021 in the form of advance CTC payments.
Question 5: Where is my refund?
I haven’t gotten this yet, but my crystal ball says I will. The IRS is way behind, and all these changes to the tax code for 2021 certainly won’t help them get caught up. This year you’ll have to be patient.
The biggest cause for delays this year will be the Recovery Rebate Credit and the Child Tax Credit. Make sure you’re reporting exactly what you received for each of these - if not, this will be the reason for the longest refund delays.
The IRS will have to confirm the amount you are claiming, and if their records are different than what you report, they will be slow on processing your return, send you a lower refund, and then a letter as to why they disagree with your claim. This can be a long process.
You can make sure that you report the correct amount by waiting to receive Letter 6457 which will report how much stimulus you received, and Letter 6419 which will report how much advance CTC you received - if you and your spouse both received the payments, then you will each get a letter.
I recommend once you file that you continue to track it via “where’s my refund” and keep your expectations low for when you’ll receive it.
Tax season has only just begun, but I suspect another complicated year for individuals and professionals. All I can ask for is that the tax law doesn’t change in the middle of the filing season again… that was brutal for everybody involved.
One last item I’ll point out is student loans. The payment pause is expected to end on May 1st, with no indication (as far as I know) about when to recertify your income, if you’re on an income driven repayment plan. If you’re in this situation and you expect your 2021 tax return to report higher income than 2020, it may be worthwhile to consider taking your time when filing your return. If you can recertify your income based on your 2020 tax return (which would be your lower income), this may lock you into lower loan payments throughout the next 12 months.
Taxes do not have to be scary! This may feel like a lot, but the technology out there today should help to guide you through many of these situations. That being said, we cannot solely rely on technology. Reviewing your situation will help you to both understand the benefits you are receiving (or can receive throughout the year) and feel confident with what you are filing.
This year, you have until April 18th to get your return filed or extended. Best of luck this tax season!