It is hard to believe it is already February. The time of year when important tax documents begin disbursing to mailboxes and e-mail inboxes across the country. Americans begin bracing for the impact of another year of sorting and organizing what can feel like mountains and mountains of tax documents. 2021 taxes may lead to having even more paperwork to sort through as we navigated another year of new legislation brought by an attempt to stimulate the economy weakened by the continued pandemic. Two of the bigger tax stimuli that will effect most people are the 3rd round of Economic Impact Payments (EIP #3) and Advance Child Tax Credit payments. With all of these tax changes I find myself often wondering, “How does the average person, not in the industry, manage to keep up with all of this stuff?!” As filing season officially began on January 24th, I thought it would be timely to share information on these tax items unique to 2021.
EIP #3, is similar to EIP #1 & #2 from the 2020 tax year in the sense that it is an advanced payment that will later be reconciled on your income tax return. The full amount of EIP #3 is $1,400 per taxpayer and dependent on your tax return. Depending on the amount of advanced payment received during the year and your Adjusted Gross Income (AGI), you may be entitled to an additional tax credit for up to the full amount. Fortunately, the opposite does not apply. If you received too much of an advanced payment from EIP #3, lucky you, there will not be any repayment amounts. EIP #3 was released in early 2021 and if you did receive by deposit or check, will be reported to you on IRS Letter 6475. Verify the amount reported on Letter 6475 against any deposit received and keep it handy for your tax return preparation.
The next item unique to 2021 are the Advance Child Tax Credit payments. These payments began on July 15, 2021 and for most taxpayers, were based upon your 2020 information. Unless opted out of, these payments were sent to “qualifying” taxpayers on a recurring monthly basis with the intent of pre-paying one-half of the estimated 2021 credit. For 2021, this credit increased to $3,600 for children ages 5 and under, and $3,000 for children ages 6 through 17, (excluding income phase-outs). Similar to EIP #3, when the 2021 return is filed there will be a reconciliation of the amounts received for the Child Tax Credit vs. the eligible credit amount. The key difference to this reconciliation in comparison to EIP #3 is, if too much credit was received, there will be a “claw-back” on the 2021 return that will reduce potential refunds or even require repayment. Any of these amounts received will be reported on IRS Letter 6419. If Married Filing Jointly, each taxpayer will receive their own Letter 6419. Verify the amounts reported on Letter(s) 6419 against any deposits and keep it with your tax documents.
Any inaccuracies on these figures when filing your tax return will significantly delay processing and any associated refunds, making it increasingly important to report accurately. Hiring a Certified Public Accountant will help ensure that you are filing a complete and accurate return.
Published in the Victoria Advocate
Christopher Laughhunn CPA/CFP® is the Tax & Accounting Principal for Keller & Associates CPAs, PLLC and an Associate Advisor for KMH Wealth Management, LLC.