Challenges faced this tax season


Allen Beatty - Contributing columnist



This is Part 1 of a 2-part series by contributing columnist Allen “Al” Beatty, Assistant Professor of Accounting at Wilmington College.

The Wilmington College VITA site kicked off the season on Monday, February 7. What a busy time it has been with already 37 returns filed and accepted in only three sessions!

This year has been, and will continue to be, challenging with all of the changes from COVID relief, etc.

I will attempt to share with the reader some of the things we have encountered at the clinic and in my own very small practice, Apple Tax Services.

Stimulus payments

Single taxpayers should have received $1,400 payments for AGI (Adjusted Gross Income) of $75,000 or less with a hard phaseout (zero being received) at $80,000. Married Filing Joint taxpayers $2,800 with AGI of $150,000 or less with a hard phase out at $160,000 and Head of Household of $112,500 or less with a hard phaseout of $120,000.

However, each taxpayer will also receive $1,400 for each “dependent” on the last known filed return. In the past, stimulus the dependent had to be defined as a child, which according to the current Internal Revenue Code is under the age of 17. In essence, each qualifying household should have received $1,400 for each person in that household.

Most of these payments were received in March but could really be anytime in the spring.

Just like “Stimulus 1.0” and “Stimulus 2.0”, these payments must be reported. However, they are not taxable. The IRS just needs the confirmation of the numbers because if a taxpayer didn’t receive the payments last spring, they might receive it as an extra refund on this year’s tax return under the name of the Recovery Rebate Credit!

One of the confusions has been payments were issued in early January of 2021, which counted for the 2020 tax return. The amount needed to prepare the 2021 return is the payment in March of 2021. The IRS is supposed to be sending out notices of these amounts in the form of Letter 6475.

However, not all taxpayers have received these letters. In fact, my wife and I have not received ours yet! If you didn’t receive a letter, most taxpayers can check their bank account, assuming it was direct deposited.

To add to the confusion from what I am seeing a married couple, even if they filed jointly, are receiving separate letters for each of his/her amount. You must add the two together! I have also noticed some spouses receiving a letter while others are not.

You have to love the modern day “privacy rules” that require separate letters.

Earned Income Credit and Additional Child Tax Credit

There have been some changes with the Earned Income Credit. This credit was put in place many years ago to assist those who have “earned income” (working) in the lower income ranges for additional assistance.

The credit is refundable meaning your refund could be in addition to all of the withholdings from your paycheck. The credit is more generous if you have children.

In the past, taxpayers without children would qualify if ages 25-64. This year the age range has been lowered to 19. Of course, those who are dependents of another such as a student would not qualify for the credit.

Furthermore, a taxpayer can elect to use their earned income from 2019 in the calculations if it would benefit them more. If you are using the same software the past couple of years this should be an automatic calculation.

However, the most challenging tax provision this year is the Child Tax Credit. In the past a “child” was any child under age 17 (i.e. 16). The provision this year defines a “child” under age 18 (i.e. a legal minor). The credit has been expanded from $2,000 per child to $3,000 from ages 6 to 17. A new “super credit” was created for children age 6 of $3,600 each!

Furthermore, parents started receiving one half of that credit in advance as payments July. Thus, one half of $3,000 for a child age 6 to 17 is $1,500. $1,500 divided by 6 months is $250 each month.

For children under age 6 the math works out to $300 per month — for each child! These amounts must be reconciled on the tax return. In essence the tax benefit was received before the tax return.

The IRS issued Letter 6419 stating the amount of the payment in total received for the six months and the number of children. Once again, a married couple who filed jointly the previous year will receive a letter for his/her half of the payment.

I have heard reports where not all letters are correct. It is early in the season, but from what I have seen they have been accurate. If you don’t have the letter, you should look through your bank records.

Your tax accountant will need the information for the “stimulus 3.0” and advanced child tax credits to properly prepare your return.

Having improper information will probably delay your return.

To be continued …

Allen “Al” Beatty, EA, CPA, MT is an Assistant Professor of Accounting at Wilmington College.

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Allen Beatty

Contributing columnist