Tag Archives: child tax credit

Illinois, IRS

Tax Season 2023 Is Officially Open! Maybe. Okay, Not So Fast.

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(Many thanks to the AICPA Town Hall for allowing members to leverage their resources, such as the slides included in this article. The opinions shared here are the author’s and not those of AICPA or CPA.com.)

Tax preparers everywhere spent the past two months gearing up for yesterday’s “opening day” of tax season, January 29th. It was an exciting time for us, as it was finally going to be a return to normal. What does that even mean anymore, you might ask? Well, most of the pandemic financial relief programs have wrapped up (save a straggler ERC claim here or there); amendments resulting from that era have almost all been filed; the odd rebates and credits that no one remembered the amounts for were a thing of the past; there were no last-minute tax extenders; and the season end-date actually lands on April 15th for the first time in ages. It felt like we finally had a handle on things and were back to the “normal” amount of seasonal overwork — rather than a Herculean lift, as was the case for the past four years.

Enter Congress. Despite the fact that The American Institute of Certified Public Accountants (AICPA), National Association of Tax Professionals (NATP) and small business advocacy groups have been lobbying for over a year to get an extension of certain popular tax benefits that expired in 2023, our leaders somehow managed to wait until after year-end to introduce legislation to that effect — Tax Relief for American Families and Workers Act — in a spectacular show of bipartisan ignorance. Never mind that the IRS e-file has been offline since November 18th, because it takes over two months to reprogram the systems for new tax laws, updates, and edits to tax forms.

As for January 30th, the legislation has yet to come up for a vote. And yet the IRS is telling taxpayers to go ahead and file when ready, and makes no reference to the pending legislation in today’s Outreach Connection email.

Some of the anticipated changes if the legislation passes as-written include popular business expensing programs that are designed to be leveraged throughout the year. Making them retroactive does nothing to spur the economy, as the decisions to buy equipment, invest in R&D, or take out loans were already made, last year.

To be clear: I’m not saying these aren’t potentially good changes for tax law, business, and the economy. Just that doing it at this late date is misguided in far too many ways.

And the part I really don’t understand is this: IRS Commissioner Werfel told reporters last Friday, “If there’s a change that impacts your return, we will make the change, and we will send you the update — whether it’s an additional refund or otherwise — without you having to take additional steps.” This is simply impossible for most of the business expensing features of the law, which are voluntary elections on the part of the taxpayer. Presumably this is a reference to the child tax credit provisions in the legislation — which have gotten the most press, but have little effect on small business owners, and are a small portion of the actual bill.

The House Ways and Means Committee released a statement recently indicating that the IRS “confirmed its intention to make necessary systems updates by around six weeks after the date of enactment”. Six weeks. Most refunds are issued within three. Six weeks takes us past the S-Corp and Partnership filing deadline. Six weeks?

Speaking of that deadline, many states announced e-filing would begin on the same date as the IRS opened federal tax season, but it turns out that our state (and I’m guessing others) did not release their S-Corp or Partnership forms with enough advance notice for our third-party tax software to program them into their system, so we are unable to e-file any Illinois business tax returns until February 7th. And we were freaking out about that delay. I can’t imagine what six weeks will look like.

To say nothing of the fact that the next government shutdown deadline is scheduled for one week before business tax returns are due. This should make for an even more laid-back season.

And to add to all of this, that the bill is being funded by an early end to the Employee Retention Credit program, as of January 31, 2024. We spent all of last week scrambling to get the remaining claims in, and won’t know whether that sprint was worth the anxiety or not until this bill passes (or doesn’t) — I feel terrible for those who find out in February that their claim’s due date is suddenly in the past.

Again, some of the provisions in this bill are great ideas — well thought-through, balanced, as well as good for business, families, and potentially the economy. Bad players in the world of ERC mills will finally have to deal with some consequences, and the 1099 burden for small vendors and freelancers will be eased as the threshold is finally indexed for inflation. Some good stuff.

So let’s pass this as 2024 legislation, just in time for the new year, as it should be… and get out of the way of tax season, already!

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COVID-19 Financial Relief, Education, IRS, Tips

Advance Child Tax Credit: Recommendation To Opt-Out

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I’m hearing from a lot of clients and colleagues about the new advance payment of the increased child tax credit that began today, and it seems there’s a lot of confusion out there, so I wanted to take a moment to explain how it works.

The child tax credit has been around for a long time, but as part of the American Rescue Plan Act that was enacted in March 2021, the child tax credit was expanded — the amount has increased for certain taxpayers; it is fully refundable (meaning you get it back even if you don’t owe the IRS); and it may be partially-received in monthly advance payments. The new law also raised the age of qualifying children to 17 (from 16).

The thing is, the amount folks are starting to receive right now is just an advance payment of half of what the IRS thinks your credit will be based on last year’s tax return. The entire credit itself will be calculated and show up on your annual tax return for 2021, and any advance payments will be subtracted from it.

So: let’s say that you qualified for a big credit based on last year’s tax return, but then you made more money this year than last year (which is the case for many small business owners) — then you’d have to pay the difference back on your tax return. As a result, we’re actually recommending to most folks that they just opt-out entirely to be safe. Don’t worry — you will get the entire amount that’s coming to you on the next tax return; you just won’t have to worry about paying back an accidental overpayment.

These tax changes are temporary and only apply to the 2021 tax year. The credit is normally part of your income tax return and would reduce your tax liability. The choice to have the child tax credit advanced will affect your refund or amount due when you file your return. To avoid any unpleasant surprises, I strongly recommend you opt out, or at least contact your tax preparer to run the numbers.

Our colleagues over at Wegner CPAs put together a 5-minute video explaining when you might want to opt out versus receiving the advance payments — it’s worth a watch! She does a great job explaining the situations when you might want to remain enrolled in the program, and other scenarios when you should definitely opt out.

If that wasn’t enough for you, please read on for more details about what it means to qualify and how much you might receive.

Qualifications and how much to expect

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

  • The credit for children ages five and younger is up to $3,600 –– with up to $300 received in monthly payments.
  • The credit for children ages six to 17 is up to $3,000 –– with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

  • Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool;
  • A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year;
  • A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number;
  • Income less than certain limits.

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments.

Taxpayers generally won’t need to do anything to receive any advance payments as the IRS will use the information it has on file to start issuing the payments.

IRS’s child tax credit update portal

Using the IRS’s child tax credit and update portal, taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children. Parents may also use the online portal to check on the status of payments or elect out of the advance payments. (To reiterate: that’s what we’re recommending to most of our clients. In general, we’d rather our clients be happily surprised at tax-time rather than frustrated that they have to return a portion of what they received.) The IRS also has a non-filer portal to use for certain situations where the taxpayers haven’t filed a tax return, similar to the one that existed for the stimulus payments.

Lastly, if you haven’t filed a tax return for 2020 yet — do not fret! The credit will show up on your 2021 tax return for the full amount; you are not missing out on getting your fair share.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.