The Growth of the Child Tax Credit Causes a Refund Roller Coaster

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While Democrats’ increase of the Child Tax Credit has expired, it has not been totally phased out. Over 40 million Americans are now required to report it on their annual tax forms.

And it’s proving to be a surprise for many.

Individuals who got monthly Child Tax Credit payments last year may be astonished to learn that those payments are now decreasing or even eliminating their tax refunds.

Some divorced individuals may be disappointed to realise they were not eligible for checks they got and now must repay the funds.

Simultaneously, other individuals will receive larger refunds, most notably the several million who opted out of the monthly payments.

Additionally, those who have had children within the last year will benefit. Additionally, some taxpayers may claim larger child credits than lawmakers intended due to a loophole in the law.

The impact on refunds might be a sore point for Democrats, putting them on the defence over one of the Biden administration’s crowning achievements.

People adore refunds, relying on them as a critical component of their budgets, and take note when their payments are less than expected or if they unexpectedly owe the IRS.

Some view the size of their refunds as a barometer of their compliance with the tax system, despite the fact that the payouts are merely the difference between what is owing and what was withheld from their paychecks. The majority of taxpayers benefited from tax cuts passed by Democrats last year in response to the coronavirus outbreak.

Democrats are in a similar position as Republicans were during the first filing season following their 2017 tax rewrite when they faced criticism over the size of refunds initially declining but eventually rebounding to about historic levels.

Last year, lawmakers temporarily increased the maximum child credit to $3,600 per child, up from $2,000. Additionally, they allowed individuals to claim it piecemeal, via monthly checks, in what was the country’s first-ever child allowance. The remainder is deductible on their tax returns.

The expansion terminated at the end of 2021, owing in part to Sen. Joe Manchin’s opposition (D-W.Va.).

The credit’s ability to lower returns may come as a surprise to some who were unaware the payments appearing in their accounts were not simply free money. They were advances against the amount that individuals would claim on their returns – the money received last year cannot be utilised as credits on their returns this year.

And, despite the increase in the credit, many taxpayers may have less to claim than in prior years.

For instance, a couple earning $80,000 and having two children is eligible for $6,000 in credits.

They received half of that in monthly instalments last year, leaving them about $3,000 to spend on their tax returns. However, they would have claimed $4,000 at tax time under the previous law, when the maximum credit was $2,000 per child.

Or someone earning, say, $250,000 with three children qualifies for a $2,000 per child benefit due to their income being too high for the Democrats’ bolstered break. If that individual took half of it in monthly payments, they will be able to claim only $3,000 instead of the $6,000 they might have claimed previously.

“If everything else remains the same, your refund will be less,” says Bill Nemeth, a long-time Atlanta tax practitioner.

Certain divorced individuals may find themselves obligated to return the funds.

The IRS made payments in accordance with what individuals stated on their 2020 tax forms. However, divorced spouses frequently switch children each year for tax purposes.

That might provide a dilemma for a mother who received the funds as a result of her children being named on her 2020 tax return. The credits were advances against 2021 taxes, and if the father is claiming the children in that year, she should not have received the payments and may be required to repay them, depending on her income. (Democrats exempted lower-income earners from having to repay money they improperly got.)

“That’s a challenging one to explain that, while you did receive the money, you were not entitled to it since you cannot claim Skippy this year, therefore you must repay it,” said Allan Reynolds, a Sioux City, Iowa, tax preparer.

According to IRS statistics, the percentage of returns that result in refunds has decreased three percent from last year, to 72 percent.

Simultaneously, the average refund has increased by 14%, a figure that has some onlookers scratching their heads. There are a variety of probable causes, including the possibility that those anticipating large payments file earlier.

Among those receiving larger refunds are those who successfully cancelled their monthly payments – no easy feat. The IRS required both couples to opt out, which was a lengthy procedure. However, those who did will now be able to receive a higher refund.

Additionally, there are almost 3 million babies born each year, and their parents will benefit as well.

Reynolds said he had a client who delivered twins last year, making them eligible for $10,000 in tax credits — two extra-large child credits and two additional $1,400 stimulus funds cut by Congress to strengthen the pandemic-ravaged economy.

“The woman cried literally,” he stated. “$10,000 is a significant sum for a new family with twins.”

Due to legal peculiarities, some individuals can enhance their credits beyond what legislators intended by simply changing their filing status.

For instance, a married couple filing jointly with an income of $80,000 and two children is eligible for a $6,000 credit. Last year, half of amount — $3,000 — was paid. According to the IRS, the cash was split 50/50 between the spouses — or $1,500 each. They would claim the remaining $1,500 on their return.

However, they can obtain additional benefits by filing separate returns:

One parent claims both children and is eligible for a $6,000 credit, less the $1,500 already declared received, for a total credit of $4,500 on their tax return.

The other parent, who is now a separate tax filer, does not claim any children. And if that person’s income is low enough, they are not required to repay the $1,500 they received last year.

As a result, the couple earns $7,500 in child credit rather than $6,000 in child credit (although there are other, unrelated disadvantages to married people filing separately, such as losing certain tax breaks, that could offset those savings).

“It creates an odd planning opportunity,” Donna Byrne, a tax attorney in Independence, Oregon, explained.

“It is a tax minimization approach that is entirely lawful under the law as written, but more than a few preparers have reservations about it because it appears to be double-dipping.”

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