Dear Appletree Client:
We want to take a few minutes to talk with you about some issues with the IRS as well as the new monthly child tax credit.
Traditionally, many taxpayers use the IRS as their personal savings bank by aiming for large refunds, oftentimes being upset when they either owe money or the amount of refund is substantially less than what they expected. This strategy is even more problematic now with frequent long waits for refunds.
The IRS continues to have substantial delays processing tax returns with refund requests. Most of this is due to the amounts reported on the tax returns for the stimulus payments does not agree with the IRS records. Where there are discrepancies, the refund is delayed, and human beings review, verify and correct the tax return to reflect the ‘proper’ refund amount due.
We do not see this issue getting any easier, and expect it to get only worse, with a third set of stimulus payments in April 2021. And now the IRS will be making monthly direct deposits or sending monthly checks for the child tax credit, which are essentially advances on your 2021 tax return for the credit they expect you to get.
You will be responsible for telling your tax preparer how much you received in stimulus payments and tax credit payments, and if the amount you report does not agree with the IRS records, you can expect that any refund will be substantially delayed.
We are making two recommendations for our clients to consider:
First, if you want to avoid delays on a substantial tax refund, then you can consider reducing your tax withholding on your paychecks and or your quarterly tax payments to reduce those refunds ahead of time. We can help you with planning for this, but please understand that it is not an exact science, and you may well end up owing tax with your tax return.
Second, we recommend that you consider opting out of receiving the monthly child tax credit checks. Anything the IRS sends to you now increases the amount due at tax time, so if you are already tuned for a breakeven return, the advance payments mean you will owe tax with your return. In addition, the IRS is estimating what that credit will be for you, and it is possible that you may not even be eligible for the child tax credit when you do your 2021 tax return. The IRS has setup a Child Tax Credit Update Portal that you can use you to unenroll from receiving these advance payments and to allow you to update your bank account information. If you and your spouse file jointly, you must EACH login to this portal with your respective social security number.
Please let us know if you have any questions by contacting Paul, Karen, Wendy or myself.