Pandemic relief money last year may mean a smaller refund this year.
Illustration by Sam Island
The flood of federal pandemic-relief money was welcome last year, but it is causing disappointment and confusion as taxpayers prepare their 2021 returns. Many will be getting smaller-than-expected refunds, tax preparers say.
Under the American Rescue Plan passed last year, two types of payments ended up in many folks’ mailboxes or bank accounts: The 2021 tax credit was enhanced and paid partially in advance to 36 million families. And 174 million families received stimulus checks. Many families received both types of payments.
Tax preparers say they are seeing a range of issues. Some individuals don’t realize they had already received directly deposited payments and won’t be getting the full credit on their 2021 returns. Others who were due advanced payments didn’t receive them. And yet others received a bigger payment than they were eligible for. In the case of the child tax credit, any excess payments must be repaid to the government.
“A lot of individuals taxpayers were under the impression that the advanced child tax credit was in addition to the regular child tax credit–that it was more free money from the government,” says Angela Anderson, a certified public accountant based in Atlanta. “The rude awakening will be when they realize the advanced child tax credit is what it sounds like—an advance, and it gets 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 to claim them on their 2021 returns, says Mark Luscombe, a tax attorney at Wolters Kluwer Tax and Accounting.
The benefits were based on income reported on 2019 and 2020 income tax returns. “People left out are those who didn’t file a tax return in those years or who weren’t eligible but became eligible in 2021—possibly their income changed or they had a child,” Luscombe says. the IRS used information from the Social Security Administration to track down low-income non-filers, but many are likely to have been overlooked, he says.
The IRS, so understaffed that it is has asked taxpayers not to try getting an agent on the line for help this year, is trying to assist taxpayers by sending notices in the mail detailing precisely how much they have been paid.
Keep an eye out for Letter 6419 with information about child tax credit advanced payments, and Letter 6475 with stimulus amounts noted. Taxpayers can also create an account at irs.gov/account to view their records.
Meanwhile, here is a close look at the two forms of pandemic relief–and their tax implications.
Advanced Child Tax Credit
The American Rescue Plan not only raised the child tax credit amount for many taxpayers, it tasked the Treasury Department to pay half of the credit to families in advance monthly from July through December.
The credit was raised to $3,000 from $2,000 per child under age 17, and an additional $600 per child under age 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 with income under $200,000.
Another change in the 2021 credit: It is refundable, meaning that even taxpayers who don’t earn enough to file a tax return can claim the credit and it can be paid out as a refund. Normally the child tax credit is nonrefundable and can only be claimed against taxable income. If these folks didn’t receive advance payments last year, they may not be aware that they can file a tax return and claim the child tax credit.
The credit’s reach was broad: More than 36 million families received payments averaging across income levels between $423 and $444 a month, according to the Treasury.
The six monthly payments may have fluctuated, so don’t base your tax reporting on one month’s payment times six–you could get it wrong, Luscombe says. “If the IRS was looking at a 2019 return to determine what you were due, but then got your 2020 return and the information was different, your payment may have been adjusted,” Luscombe says.
The bad news: Taxpayers who were paid out advanced credits that weren’t due to them–possibly their child aged out of the credit in 2021, or their income went up–must repay it to the IRS either outright or through a reduction against a refund.
Those who have been underpaid can claim the balance of their child tax credit on their 2021 returns.
Recovery Rebate Credit
The Recovery Rebate Credit is more straightforward. Joint 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 their full credit amount last year, either directly deposited into their bank accounts or with a mailed check. Any discrepancy between the amount owed and received can be claimed on a 2021 return.
But pay close attention, Anderson says. “Unfortunately, there were a lot of errors made sending out stimulus. It was sent to people no longer living, to formerly married couples now divorced, for example.”
The good news is that any taxpayers who were paid more stimulus money than they were eligible for aren’t 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 get those confused with 2021 payments, Luscombe says.
“When you’re subtracting what you’ve received to find what you can claim, this is potentially confusing,” he says. “Also, this year’s credit can be claimed for dependent aging parents, so taxpayers should look out for this–make sure they got those payments.”
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