Taxpayer refunds ride the roller coaster of the Child Tax Credit expansion
Despite the expiration of Democrats’ Child Tax Credit expansion, the program hasn’t been abolished entirely. It now affects over 40 million American taxpayers each year.
As a result, many are finding it a surprise.
In other cases, taxpayers will see a reduction or even elimination of their refunds if they get the monthly Child Tax Credit checks approved by lawmakers just one year ago.
Divorced people may be miffed if they discover that cheques they received were invalid and that they must return the money they received.
Some taxpayers, notably the several million who choose not to make monthly payments, will receive larger refunds.
People who have had children in the last year will also be affected. Some taxpayers may be able to claim larger child tax credits than lawmakers intended because of a legal loophole.
For Democrats, the impact on refunds might be a sensitive issue, putting them on the defensive on one of the administration’s most significant achievements: the Biden tax cut.
Getting a refund is a big deal for most people, and they pay attention when their payments are smaller than expected or if they suddenly owe money to the Internal Revenue Service.
It is common for people to mistakenly believe that the size of their refunds is a measure of how well they are doing financially under the tax system, while in reality, the refunds are simply the difference between what is owed and what was withheld from their paychecks. Democrats passed a bill last year to help those affected by the coronavirus outbreak.
Democrats are in a position similar to that faced by Republicans during the first tax-filing season following their 2017 tax reform when the size of refunds initially dipped before recovering to about historic levels, which drew criticism from the public.
Last year, lawmakers increased the maximum child credit from $2,000 to $3,600 for a limited time. In what was the country’s first-ever child allowance, they also permitted people to claim it in monthly installments. It is up to them to claim the rest on their tax return.
Sen. Joe Manchin, a Democrat from West Virginia, was among those who opposed the extension, which expired at the end of 2021.
Some people may be surprised to learn that the payments showing up in their accounts aren’t merely free money and that the credit can minimize refunds. As a result, the number of money people got last year cannot be utilized as a credit on their tax returns this year.
Even with the larger benefits, many taxpayers may find themselves with fewer deductions this year than in years past.
A couple making $80,000 a year with two children can claim $6,000 in tax benefits.
About $3,000 remained after they took home half of that in monthly payments the previous year. In the past, the maximum amount for each child was $2,000, so they could have claimed $4,000 in tax credits.
People making $250,000 with three children, for example, qualify for a $2,000 per child benefit since they make too much money to qualify for the Democrats’ beefed-up break. You can’t claim $6,000 if you pay half of it in monthly installments, so you’ll only be eligible for $3,000.
“Your refund will be less if everything else is the same,” says Bill Nemeth, a long-time Atlanta tax practitioner.
Some divorces may be required to refund the funds.
People receive payments from the IRS based on the information they provide on their tax forms for 2020. However, divorced families often switch children for tax purposes each year.
For example, if a mom received the funds because her children were named on her 2020 tax return, that could be a problem. Depending on her income, she may be responsible for repaying the credits if the father claims the children in 2021, which is when the payments were made.
In other words, Democrats exempted lower-income people from having to pay back the money they shouldn’t have received.
According to Sioux City, Iowa tax preparer Allan Reynolds, “that one is harder to explain since you did receive the money but were not entitled to it because you didn’t get to claim Skippy this year, so you have to pay it back.”
According to IRS data, the percentage of returns resulting in a refund has decreased by 3% this year, to 72 percent.
In addition, the average refund has increased by 14 percent, a figure that has some observers stumped. It’s plausible that people who expect large payouts are filing early, but there are a number of other factors as well.
Among those receiving larger refunds are those who were able to cancel their monthly payments, which was not a simple process. In order to opt-out, the IRS needed both spouses to go through a lengthy process. Those that did, on the other hand, will be able to receive a larger refund.
More than 3 million kids are born each year, and their parents will benefit from the tax cuts as a result.
One of his clients qualified for $10,000 because they received two extra-large child credits and two $1,400 stimulus checks cut by Congress to help the pandemic-battered economy, he told The Hill.
He described how his wife was in tears. To a new family with twins, $10,000 is a significant amount of money.
Some people are able to boost their credit scores far beyond what legislators intended by just changing their filing status due to legal oddities.
A married couple who make $80,000 and have two children can claim a $6,000 tax credit. Last year, $3,000 of that was paid.
Each spouse is entitled to receive $1,500 from the payment, which the IRS considers to have been split 50/50 between them. The remaining $1,500 will be claimed by them when they file their taxes.
Filing separate tax returns, on the other hand, allows them to receive additional benefits:
After deducting $1,500 from the $6,000 tax credit they are qualified for on their return, one parent can claim the credit for $4,500 on their tax return.
He or she does not have any children to claim on his or her own tax return. They don’t have to repay the $1,500 they received last year since their income was deemed modest enough.
As a result, instead of receiving $6,000 in child tax credits, the couple now earns $7,500. (although there are other, unrelated disadvantages to married people filing separately, such as losing certain tax breaks, that could offset those savings).
Donna Byrne, a tax attorney in Independence, Ore., described it as “a really weird planning opportunity.”
A tax-cutting approach that is totally lawful under the law as written, but there are more than a few tax preparers who have some reservations about it since it feels like double-dipping.