Tax pros warn some clients on taking monthly child tax credit

(Bloomberg) — Some tax professionals are urging clients to consider opting out of receiving new monthly payments of the child tax credit because they could end up having to pay back that money next filing season.

The American Rescue Plan enacted in March increased the benefit for 2021 and directed the IRS to deliver half of the amount that families are eligible for in checks beginning in July. The payments are worth up to $300 per month for each child under age 6, and up to $250 for each child ages 6 to 17.

Normally, parents would claim the credit as a lump sum on their annual tax returns — in this case, the ones filed next year — lowering their overall tax bill or resulting in a refund.

The changes to the credit have been touted by President Joe Biden’s administration and others as a way to reduce child poverty and help families that are struggling to make ends meet. But some tax professionals are concerned about clients having to pay money back next filing season, due to changing circumstances with their jobs and salaries.

Phyllis Jo Kubey, an enrolled IRS agent in New York City, said she is urging clients who are eligible for the payments to opt out. She said she’d only consider advising clients otherwise if they’re experiencing financial hardship and really need the money now.

‘Trip People Up’
Congress directed the IRS to use 2019 or 2020 tax return information to deliver the payments. The enhanced credit, for the entire year, is worth up to $3,000 per child aged 6 to 17 and $3,600 for children under age 6. That’s an increase from $2,000 per child under age 17.

The maximum amount is available to individuals making $75,000 or less and married couples making $150,000 or less, with a phaseout for incomes above those thresholds.

While the IRS is using older income information to deliver the monthly payments, the credit owed is ultimately determined by 2021 income and will have to be reconciled on next year’s tax return. That means individuals who got a new job or received a raise in 2021 may find themselves owing money to the government if their monthly payment was too high, tax professionals warn.

“That’s going to trip people up because they’re expecting, ‘Well, if the government gave it to me, I don’t have to give it back,’” said Eric Pierre, a CPA with offices in Austin, San Diego and Los Angeles.

People might also receive too much in monthly payments if they have a child who no longer qualifies as a dependent in 2021, but was accurately claimed on the 2019 or 2020 tax return. The March law offers some repayment protection in those cases for lower-income households.

IRS Tool
The IRS is expected to soon release a tool, the Child Tax Credit Update Portal, that will allow people to opt out of the monthly payments. The agency in a news release last week said later in the year that the tool will also enable people to update their information.

Albert Campo, a CPA in Manalapan, New Jersey, expressed doubt that taxpayers will take the time to make those adjustments.

“A lot of taxpayers won’t take the onus to actually go into the portal and update it,” he said.

Adam Markowitz, an enrolled agent and vice president at Howard L Markowitz PA CPA, said he is making clients aware of the possibility that they could owe money back to the government. But he is still urging the majority who are eligible to take advantage of the monthly payments because of the huge benefit they can provide to struggling families.

The Urban Institute has estimated the advance portion of the Child Tax Credit will reduce the share of children in poverty from 13.7% to 11.3%.

“Blanketly saying ‘opt out’ defeats the purpose of the program, particularly when you have these people who are living paycheck to paycheck,” Markowitz said.

Withholding Headache
Markowitz said his big concern is that the IRS hasn’t adjusted the Form W-4, which workers fill out to let their employers know how much money to withhold from their paychecks, to account for the changes.

Absent those adjustments, individuals could end up getting an improper amount of tax withheld, which may result in higher taxes next filing season, he said.

The current form for 2021 assumes each child under age 17 translates to a $2,000 credit at tax time — the amount available prior to the American Rescue Plan. But the actual amount paid out next filing season could be smaller for people who received half of their new, increased credit through advanced payments.

For instance, Markowitz said, if a taxpayer has a 10-year old child and receives the advanced payments, that person will get a $1,500 credit on their tax return next year, not a $2,000 credit — meaning they’ve potentially been underwithheld by $500.

“The withholding is tricky and tough for most people to get right, in general,” Kubey said.