American Rescue Plan outlined

 The American Rescue Plan Act included changes to the child tax credit that were designed to benefit certain taxpayers; however, some of these changes are now causing confusion and anxiety for many. 

The American Rescue Plan Act included changes to the child tax credit that were designed to benefit certain taxpayers; however, some of these changes are now causing confusion and anxiety for many. The American Institute of CPAs (AICPA) recognizes the stress many taxpayers and tax professionals are experiencing and is providing useful information and tips to help ease the burden, reduce the complexity and clarify details.

What Are the Big Changes Taxpayers Need to Be Aware Of?

Among the many changes to the child tax credit, AICPA recommends that taxpayers be aware of the following:

• The age of qualifying children was raised from 16 to 17.
• The tax credit amount has increased for certain taxpayers.
• It is fully refundable (meaning you can receive it even if you don’t owe the IRS).
• Up to half of the credit may be received in monthly payments unless taxpayers opt out.
• The IRS will pay half the credit in the form of advance monthly payments beginning July 15, 2021 as a prepayment of the refund taxpayers would normally receive when they file their 2021 income tax returns. Taxpayers will then claim the other half when they file their 2021 return.

How Might the Tax Credit Impact 2021 Tax Returns?

Taxpayers should also understand that these changes are temporary and only apply to the 2021 tax year, and the decision to have the child tax credit payments received in advance will affect a taxpayer’s refund or amount due when that return is filed.

This means for those who choose to receive advance monthly payments now, they will either receive a lower refund next year or potentially owe tax (and maybe interest and penalties) that they wouldn’t ordinarily owe. To avoid any surprises, it’s important for taxpayers to contact a CPA to discuss their situation and make any necessary plans.

Should Taxpayers Opt Out of Receiving the Tax Credit?

Many taxpayers remain confused about whether they should opt out of receiving advance monthly payments. Here are some of the instances where taxpayers may want to opt out:

• If a taxpayer expects to owe taxes when they file their return next year, they might not want the advance payments now (as it would add to the amount they owe later).
• If a taxpayer is paying estimated taxes (e.g., the taxpayer is self-employed), they likely do not want to receive advance child tax credit payments. This is because the estimated tax the taxpayer is paying the IRS and the advance child tax credit payments that the IRS is giving the taxpayer are essentially netting each other out and can result in more tax (and potentially interest and penalties) owed when the taxpayer files their return.
• If taxpayers are divorced or separated and alternate claiming dependents.
• If a taxpayer’s income has increased from the prior years.

“Deciding whether or not to opt out of the child tax credit is a personal and individual decision that each qualifying taxpayer needs to make,” said AICPA Director for Tax Practice & Ethics, Cari Weston, CPA, CGMA. “Accepting the credit now can be a lifeline for many, but it’s important that taxpayers know how this will affect them during next year’s tax filing season as well. The AICPA is providing resources to our members to allow them to help their clients navigate the consequences and challenges they face.”

What Resources Are Available?

AICPA’s 360 Degrees of Financial Literacy program provides Americans with free resources to help them better understand their finances and make more informed money decisions. The website features articles, videos and financial calculators as well as information about working with a CPA, filing taxes and the importance of year-round financial planning.

Taxpayers can update their information to reflect any new information that might impact their child tax credit amount, such as filing status or number of children, using the IRS’s child tax credit and update portal. Parents may also use the online portal to elect out of the advance payments or check on the status of payments. Note that certain functions of the IRS online portal are not currently available but are coming soon.

The IRS also has a non-filer portal to use for certain situations. Non-filers are those individuals who do not need to file a tax return but would have received a stimulus payment, such as individuals out of work, receiving Social Security or who are homeless.

Thanks to the AICPA for this information

Opting out of the Child Tax Credit Advance

 

Opting Out Of Advance Payments Of The Child Tax Credit? Try These Tipscover individual tax issues and IRS developments.

Want to opt out of advance Child Tax Credit payments or update your information? It's a process. So ... [+]

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This story has been updated to clarify the differences between authenticating an IRS secure access account and authenticating using ID.me.

It’s already too late to opt out of the first payment of the Advance Child Tax Credit (CTC). Taxpayers still wishing to unenroll need to do so at least three days before the first Thursday of the following month. For example, to unenroll for the August 13 payment a taxpayer must complete the unenrollment process by August 2. The full schedule of unenrollment deadlines is provided in Topic J of the IRS FAQ for the Advanced CTC. Taxpayers should note that unenrollment may take up to seven days to process and the IRS recommends checking back to ensure that you have been successfully unenrolled. For joint filers both spouses must opt-out of the advance payments to fully opt out. Otherwise, the spouse who did not opt out will receive one-half of the calculated payment.

Taxpayers are also now able to use the Manage Payments Portal to update bank account information for payments beginning in August. July payments will use bank information already on file with the IRS. Bank information updated using the Manage Payments Portal will take effect the following month. In other words, to ensure your payments are directed to the correct bank account, update your bank information as soon as possible. It remains unclear what will happen to misdirected direct deposits.

So, you’ve decided to opt out or you need to update some information. First you will need to authenticate yourself with the IRS. If you already have an IRS secure access account you should use that for the authentication. If not, the opt out portal will require you to authenticate using the IRS’ third-party service, ID.me. While technically it is still possible to obtain a secure access account, and in some cases it may be desirable to do so, the IRS is moving away from the authentication technology used for secure access accounts. ID.me is their new, preferred authentication method. Kathy Morgan, Enrolled Agent and owner of Puzzled By Taxes, LLC in Haughton, Louisiana warns that the process to either set up an IRS secure access account or to use ID.me for authentication involves multiple steps that while not complex are not simple either. Here are some tips:

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• For either a secure access account or ID.me, be prepared for a high technology process and the glitches that come with it.
• For ID.me have your photo ID ready. Either a driver’s license or a U.S. passport. The ID.me system will use your phone’s camera or webcam to compare your face to the face on the photo ID.
• For a secure access account, be ready for knowledge-based authentication (KBA) questions. You may need to answer questions about your mortgage or your credit card accounts so have that information handy.
• Either type of authentication requires a cell phone. A secure access account requires that the cell phone plan be in your name. If you have a family plan and your name isn’t the one on the plan then you may not be able to create your account.

Kathy notes that “Any taxpayer who doesn’t have access to all this technology has no option [to opt out or update information] as there is not currently a number to call to do an opt out via phone. If the taxpayer doesn’t have a U.S. drivers license or U.S. passport they are also out of luck.” Taxpayers attempting to authenticate using ID.me actually can validate their identity over the phone with the IRS using a process similar to video chat but the number is not provided until after three failed attempts to validate online. Many taxpayers will not have the patience to attempt three times and then make the call.

Kathy predicts that “Most taxpayers are going to say the heck with it and deal with it at tax time next year” and “if they aren’t claiming the kids or they set their withholding to a minimum expecting the credits to cover the tax or generate a refund, they are going to be in for a big surprise.” She and other tax practitioners are concerned that many taxpayers are not going to understand the difference between the advance CTC payments and the EIPs and, consequently, will be surprised, frustrated, and likely unprepared if they have to repay excess credit amounts. Most tax professionals are predicting another rough filing season.

Here are a few more tips for recipients of the advance payments that may make next year’s filing season go a bit more smoothly for you, your tax practitioner (if you have one), and the IRS:

• If you are required to file a 2020 tax return and have not yet done so do not use the non-filer portal to receive your advance CTC payments. Doing so may get you your payments, but it may also result in you having to file an amended return for 2020. The non-filer portal files a simplified version of Form 1040 and that will be considered your original return if you have a filing requirement. And remember, even if the IRS opens e-filing for amended 2020 returns, amended returns are still manually processed and manual processing will delay your refund.
• Keep your end of year reconciliation letter! The IRS will not be issuing a version of Form 1099 (or any other form) to taxpayers. Instead they will be issuing Letter 6419 which will state the amount of advance CTC payments paid in 2021. For 2020 returns many taxpayers didn’t save their EIP letters (Letter 1444) and once EIP 3 started being issued, the look-up tool for EIPs 1 and 2 was taken offline. Manual review of Recovery Rebate Credits for taxpayers who didn’t save or didn’t receive their Series 1444 letters is one of the reasons many 2020 tax returns have not yet been processed and taxpayer refunds are being delayed. Tax practitioners are hoping that, come filing season 2022, a look-up tool for the advance CTC payments will be available to both taxpayers and tax practitioners with the proper authorizations on file to ensure that the payments are correctly reconciled on taxpayers’ 2021 tax returns.
• Keep revisiting the IRS FAQs. The IRS updates the FAQ information frequently. Unfortunately, the frequent updates mean revisiting the site to check for updates and re-reading questions to ensure that the information you read a week ago hasn’t changed recently. It’s tedious but the information is thorough and reasonably well organized into topics.

The expansion of the child tax credit is going to lift millions of American children out of poverty and help 39 million households. Advance payments of the credit will get money to families who need it right now. If you and/or your tax professional have decided that opting out is a better option for your family it is best to do so as early as possible and to be prepared for the full process from ID verification through verifying that your unenrollment was successful and/or your updates were processed.

Thanks to Amber Grey-Fenner and Forbes for much of this information!