In 2021, the enhanced Child Tax Credit gave millions of families some financial cushion through monthly payments.
In 2022, the same tax credit might take away from the size of many income tax refunds — or even give some unanticipated tax bills — according to tax professionals who are bracing for agitated clients.
“There’s going to be plenty of people I talk to who are going to be very upset,” said Mike Zeiter, owner of Zeiter Tax Services, in Carthage, Mo.
Zeiter is flagging the link between the child tax credit and potentially smaller refund in his letter to clients as tax season kicks off on Jan. 24. “I’m still trying to work on the exact phrasing. I’m trying not to work people into a downward spiral already in January.”
Since the fall, Paul Fenner, founder of TAMMA Capital in Detroit’s suburbs, has been telling clients if they received the monthly child tax credit payments, their refunds may be lower and some may even owe taxes.
“I’ve been planting that seed. Even though I’ve planted that seed, I still anticipate I’ll get some families that will be upset,” said Fenner, a father of four who put the child tax credit funds he received into a savings account where it waits to pay for any potential tax bill.
But lawmakers increased the Child Tax Credit for 2021, so why are Fenner, Zeiter and other tax professionals managing expectations for a tax refund decrease?
It goes back to the way Congress beefed up the credit when passing the $1.9 trillion American Rescue Plan in March. Before that point, the credit paid a maximum $2,000 per eligible child. The legislation turned the maximum payout to $3,600 for children under age 6 and $3,000 for children between the age of 6 and 17.
Half of the enhanced sum was chopped into monthly installments paid from July to December. The credit’s other half is coming in the traditional form, by being lumped into the tax refund. The issue is, the lump sum waiting in the wings, whether it’s up to $1,800 for younger kids or $1,500 for older kids, is smaller than the $2,000 maximum.
To be clear, households could skip the advance payments and opt for the larger lump sum. Still, the families of over 61 million children received $16 billion in payments during December and the IRS paid families nearly $93 billion since July, the Treasury Department said.
Even if people understand they’re getting less in the refund because they received more upfront, Fenner said the smaller refund may still be an emotional shock because many people want a refund they can plan on. “It’s a whole other thing to experience it when it does not show up,” Fenner added.
The average individual income tax refund was $2,815 as of early December, IRS statistics show.
The Biden administration wants the enhanced credit to continue in 2022 as one 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 the enhanced credit are unclear.
‘All of the sudden, then you have to pay it back’
There’s another reason this version of the child tax credit could gnaw into refunds: a repayment obligation if a household took the advance payments but made too much money in 2021.
An individual needed to make up to $75,000 before the eligibility for the boosted part of the credit started phasing out. It was $150,000 for a married couple filing jointly and $112,000 for a person filing as head of household.
The IRS is sending out letters documenting how much it paid each family receiving the credit. If a household took the advance payments but wound up with annual income above those thresholds, the IRS will recoup the overpayments. Depending on the rest of a person’s tax situation, it has said it will square up the bill either by trimming the refund or adding a balance due.
That’s going to be another rude awakening — especially after three rounds of stimulus checks, Zeiter said. When it came to economic impact payments, the rules said people who received the money didn’t have to pay it back if they ended up making more than the income eligibility levels. Now, when it comes to the Child Tax Credit, “all of the sudden, then you have to pay it back. Those are the biggest concerns I have in terms of conversations with clients.”
The tax credit’s potential complications come during a tax season the IRS is cautioning could get rough. The agency’s staff is overloaded, understaffed, backlogged and in need of more money to meet taxpayer needs, Treasury Department officials say.
The Child Tax Credit’s intricacies will add to the administrative headaches. For example, two of Fenner’s clients could have used some help. They tried to opt out of the advance payments via an online IRS portal. It didn’t work and they could never connect with someone at the IRS to fix the matter. “They couldn’t stop the checks from coming,” he said.
One of Joanne Burke’s clients may need some help too. The IRS recently sent the client a letter saying she received a $500 child tax credit payment even though she didn’t, said Burke, of Birch Street Financial Advisors in Vienna, Va.
Burke’s hunch is it may do with outdated tax return information after the client’s January 2021 divorce. The client’s taking steps like reviewing her bank records and checking her online IRS account.
But Burke might need to try connecting with the IRS for a fix — a prospect she’s dreading after calling the agency for other questions, staying on hold for hours and hearing an automated system hang up. “It has been just really trying…I just want to avoid the IRS at all costs,” Burke said.
Can another tax credit help?
The child tax credit’s lump sum may be smaller for families receiving the monthly installments, but Congress also boosted the Child and Dependent Care Tax Credit (CDCTC) for 2021 and made it “substantially more generous,” according to the IRS.
For example, the credit’s maximum payout goes up to $4,000 for one eligible dependent and $8,000 for two or more. That’s up from $1,050 for one child and $2,100 for two or more. The percentage of expenses covered went from 35% to 50% and the income threshold rules relaxed.
The Bipartisan Policy Center has a calculator that estimates how much money a person could receive under the enhanced credit.
The CDCTC “should have pretty significant impact” Zeiter said. But the tax help with the higher refund really goes to the families of younger kids who need childcare, he noted. (The credit applies to dependents under age 13 and certain adult dependents.)
Of course, to claim the credit this year, a family needed to find and pay a center or person for childcare last year. That was harder than it sounds as daycare centers faced labor shortages, rising costs and potential closures.
One-third of childcare providers were considering closing up within the next year, according to a survey released in September by the National Association for the Education of Young Children.