2022 Tax Refund: How Child Tax Credits Could Lead to Costly Surprise

by TK Sanders
2022-tax-refund-how-child-tax-credits-could-lead-costly-surprise

Outsiders who received a monthly child tax credit payment in 2021 may be in for a big surprise come tax refund time.

President Biden’s American Rescue Plan, implemented in March 2021, increased upfront tax breaks for families with children. Children under age 17 increased from $2,000 to $3,000. Moreover, children under age 6 received another $600 in credits still.

While the credits came as a relief during the fiscal year to some, many families will see an increase in tax liability come filing time. Why? Because with the credits already applied, they have less liability to write off from their gross income.

“That will certainly be a surprise for folks,” said certified financial planner Patrick Amey, an advisor at Financial Advisory Service, Inc. “And you’re not going to know exactly where you fall until you actually file your taxes, given the complexity of the calculation.”

Essentially, the problem arises if the increased credits catapult you past an income threshold. The IRS always looks at adjusted gross income last. This means that all benefits and credits (which seem like free money during the year) effectively increase your income in the eyes of the government.

In 2021, many families received $1,800 for young children and $1,500 for older children, based on previous years’ incomes. The increase in credits, paired with a decrease in wages for many thanks to the pandemic, could spell disaster for taxes.

“That’s going to be a rude shock for a lot of folks,” said Dan Herron, a San Luis Obispo, California-based CFP and accountant. “Especially with a big swing between 2020 and 2021 income.”

Who Qualifies for Credit Eligibility?

Two phaseouts exist for the tax credit. The first one starts above $75,000 for single parents (or $150,000 for joint filers). The second starts once adjusted gross income exceeds $200,000 for single filers and $400,000 for couples.

Unfortunately, it’s not always an easy roadmap for filers. Herron recommends working with a tax professional to better guarantee that your returns most benefit your personal situation.

If you’re unsure about your status, keep an eye out for letters from the IRS. They began mailing Letter 6419 in late December. This official letter will help families determine their personal tax liabilities. You can also find the information on the IRS website under the Child Tax Credit Update section.

Avoid delays

Getting your taxes right could mean the difference in a correct refund versus a delayed refund. The IRS can also follow up months after you’ve filed your taxes and demand more money if the information is incorrect.

According to the IRS, there were 6.3 million unprocessed returns as of December 18, including 2020 filings with errors. Many certified financial planners and accountants believe it will get worse before it gets better. Making sure your payments match the information from Letter 6419 is the best way to ensure a speedy, smooth tax process.

Outsider.com