‘I try not to send people into a downward spiral’: Why some parents should prepare for a lower tax refund in 2022

In 2021, the enhanced Child Tax Credit has given millions of families a financial cushion through monthly payments.

In 2022, the same tax credit could reduce the amount of many income tax refunds — or even give rise to unforeseen tax bills — according to tax professionals bracing for restless clients.

“There will be a lot of people I talk to who will be very upset,” said Mike Zeiter, owner of Zeiter Tax Services in Carthage, Mo.

Zeiter flags the link between the child tax credit and a potentially smaller refund in its letter to clients as tax season kicks off Jan. 24. “I always try to work out the exact wording. I try not to send people into a downward spiral already in January.

Since the fall, Paul Fenner, founder of TAMMA Capital in suburban Detroit, has been telling clients that if they received monthly child tax credit payments, their repayments could be lower and some might even owe taxes.

“I planted this seed. Even though I planted this seed, I still anticipate that some families will be upset,” said Fenner, a father of four who put the child tax credit funds he received into an account. savings where he waits to pay for any potential tax bill.

But the legislators increases the child tax credit for 2021, so why are Fenner, Zeiter and other tax pros managing expectations of a tax refund to diminish?

It goes back to how Congress bolstered credit when passing the US $1.9 trillion bailout package in March. Prior to this point, the credit paid a maximum of $2,000 per eligible child. The legislation increased the maximum payment to $3,600 for children under age 6 and $3,000 for children ages 6 to 17.

Half of the increased sum was divided into monthly installments paid from July to December. The other half of the credit comes in the traditional form, being bundled into the tax refund. The problem is that the lump sum waiting in the wings, whether it’s $1,800 for young children or $1,500 for older children, is less than the $2,000 maximum.

To be clear, households could ignore the prepayments and opt for the higher lump sum. Still, families of more than 61 million children received $16 billion in payments in December, and the IRS has paid families nearly $93 billion since July, the Treasury Department said.

Even if people understand they are getting less reimbursement because they received more upfront, Fenner said the smaller reimbursement can still come as an emotional blow because many people want a reimbursement they can plan on. “It’s a whole other thing to experience it when it doesn’t show up,” Fenner added.

The average personal income tax refund was $2,815 at the start of December, according to IRS statistics.

The Biden administration wants enhanced credit to continue in 2022 as part of a broader social safety net bill. Skeptics like Sen. Joe Manchin, a centrist Democrat from West Virginia, have their doubts, and the future of the bill and enhanced credit is unclear.

‘All of a sudden then you have to pay it back’

There’s another reason this version of the child tax credit could eat away at refunds: a refund requirement if a household took the advance payments but made too much money in 2021.

A person had to earn up to $75,000 before eligibility for the increased portion of the credit began to disappear. It was $150,000 for a married couple filing jointly and $112,000 for someone filing as head of household.

The IRS sends letters documenting the amount it paid to each family receiving the credit. If a household took the prepayments but ended up with an annual income above these thresholds, the IRS will recoup the overpayments. Depending on the rest of a person’s tax situation, he said he would settle the bill by either reducing the refund or adding a balance owing.

It’s going to be another rude awakening — especially after three rounds of stimulus checks, Zeiter said. When it comes to economic impact payments, the rules said people who received the money didn’t have to repay it if they ended up earning more than income eligibility levels. Now, on the child tax credit, “all of a sudden you have to pay it back. These are the biggest concerns I have in terms of customer conversations. »

The potential complications of the tax credit come during a tax season that the IRS says could get tough. Agency staff are overworked, understaffed, behind schedule and need more money to meet taxpayer needs, Treasury Department officials say.

The complexities of the child tax credit will add to administrative headaches. For example, two of Fenner’s clients might have needed help. They tried to withdraw prepayments through an online IRS portal. It didn’t work and they were never able to contact anyone at the IRS to resolve the issue. “They couldn’t stop the checks from coming in,” he said.

One of Joanne Burke’s clients might also need some help. The IRS recently sent the client a letter saying she had received a $500 child tax credit payment even though she had not, said Burke, of Birch Street Financial Advisors in Vienna. , Virginia.

Burke’s hunch is that it could be due to outdated tax filing information after the client divorced in January 2021. The client takes actions such as reviewing her bank statements and verifying her IRS account in line.

But Burke may have to try to connect with the IRS for a fix — a prospect she dreads after calling the agency with further questions, being on hold for hours and hearing an automated system hang up. “It really tried…I just want to avoid the IRS at all costs,” Burke said.

Can another tax credit help?

The Child Tax Credit lump sum may be smaller for families receiving the monthly payments, but Congress has also increased the Child and Dependent Tax Credit (CDCTC) for 2021 and has made “considerably more generous,” according to the IRS.

For example, the maximum credit payment can reach $4,000 for one eligible dependent and $8,000 for two or more people. This represents an increase of $1,050 for one child and $2,100 for two or more. The percentage of expenses covered has been increased from 35% to 50% and the rules relating to the income threshold have been relaxed.

The Bipartisan Policy Center has a calculator that estimates how much money a person could receive under enhanced credit.

The CDCTC “should have quite a big impact,” Zeiter said. But the tax assistance with the higher rebate really goes to families with young children who need child care, he noted. (Credit applies to dependents under age 13 and certain adult dependents.)

Of course, to claim the credit this year, a family had to find and pay for a center or person for child care last year. It was harder than it looks, as child care centers faced labor shortages, rising costs, and potential closures.

According to a survey released in September by the National Association for the Education of Young Children, a third of child care centers planned to close within the next year.

Maria D. Ervin