We are noticing that some clients believed the child tax credit advance they received was actually some sort of stimulus. Unfortunately this has caused a lot of people who were normally “breaking even” on taxes in the past, to owe taxes this year. This occurred because that child tax credit was a direct deduction off their total federal tax. If taxpayers received the advance, they got the credit in their pocket during the year instead. Part of this confusion is coming from the government as well as the local news agencies for not making it clear that this was an advance on a credit that you normally would get on your tax return. I believe calling it a loan on your tax return would have been a lot clearer for most people. You can actually opt out of this loan, umm, I mean advance, by going to the IRS.gov website. It requires an “IDMe” set up to allow them to ensure that no one is stealing anyone else’s tax information or identity. For those who don’t want to go through with the IDMe registration there are some things that they can do instead. One option you have is to change your W-4 for additional withholdings to cover the amount of the credit that you got in advance. This is only a consideration if you were breaking even or owed taxes in prior years. Another option is to be prepared for owing a little and set money aside. I actually have had several clients say they just held it aside because they were sure it came with strings attached. And it turns out it did. If you got well over the advance as a refund you can just expect that your new refund for 2021 is going to be less by the amount of the actual distribution of the advanced credit. Remember the best way to not stress about taxes is to understand as much as you can about your taxes. This information is meant to provide you some extra information so that you are ahead of the game and know when you do your taxes that there is going to be a pretty big change from last year to this year. If nothing else you are now aware of a possible change when you go in to do your taxes so be prepared to possibly owe a little this year. One way you can figure it out is to take your refund from 2020 and subtract the advance child tax credit that you received in 2021. If your answer is a negative number, chances are you are going to owe when you do your taxes this year. And of course if you have a positive number, chances are you will just receive a smaller refund. Due to the pandemic year in 2020, there are other factors that have to be considered. Perhaps in 2020 you weren’t working as much as in 2021 and you received a bigger refund. So it might make sense for you to use 2019 as your income/refund starting point instead of 2020. Which ever numbers you choose the formula is the same. subtract what you received from what you normally get back or owe and you will have a good idea of what effect it will have your tax return this year. Subscribe to my blog for weekly posts.
