What? Those Advanced Payments Affect My Taxes?
In 2021, the Child Tax Credit was raised from $2,000 per qualifying child to $3,600 for children under 5 and $3,000 for children ages 6 to 17. Even better, the IRS sent you advance payments of this credit, whether you asked for them or not. This was great! Wasn’t it?
As with most tax questions, the answer to that is, “It depends.” Many of our clients who are young enough to have children are also young enough to have careers on a sharp upward trajectory. Many of you will not qualify for the entire credit in 2021. Although COVID affected everyone, some businesses and their employees did very well in 2021.
If you did not qualify for the entire credit for 2021, and the IRS sent you advanced payments, what does this mean? First, if you received your child tax credit during the year, you would not get the benefit of that credit on your tax return. This will cause a reduction in your refund or even cause you to owe tax, as many of you have relied on the child tax credit not for refunds, but to break even. Second, if you received more than your tax return calculates you should have received, you will owe that money back in the form of a reduced refund or an amount due.
What can you do? Make sure you bring us Letter 6419, that was issued in December. This letter shows the amount of advanced payments you received in 2021. In addition, bring a list of the actual payments you received, so that we can determine if the letter is correct. Many of these letters do not account for refused, returned, or bounced payments. Correct information will allow us to report your payments correctly on your tax return. Reporting anything other than the amount on Letter 6419 will delay your tax return.
Please remember these were not tax-free Economic Impact Payments, but advanced payments of a credit for which you may or may not have been eligible. Talk with us when you deliver your tax information to us, if you have any concerns about this issue.