Recent Tax Changes – Can the IRS Keep Up?

At the end of May the IRS had a backlog of 35 million tax returns, three times the number they had a year ago. In 2020 the IRS ran on restricted capacity due to Covid concerns, labor shortages and budget cuts, which stained its ability to process tax returns. Layer on top of this three rounds of stimulus payments that had to be distributed, challenges with paper-filed returns and the continuously evolving new tax laws and credits and you had what a National Taxpayer Advocate called a “perfect storm”. The IRS is now operating at a more normalized pace but limited resources continue to cause delays.

New Processes Causing Delays

Delays are also being caused by new processes. The IRS is manually checking 2020 tax returns that claimed a recovery rebate credit. These reviews are necessary to confirm the correct amounts of the credit for the first and second stimulus checks. The IRS also has to work on automating for these recent tax developments.

Unemployment Taxation

The IRS has also made changes to how they are taxing 2020 unemployment income and working those changes through the system. If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on unemployment compensation of up to $10,200. If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation

Advanced Child Tax Credits

You may have seen a deposit directly into your bank account or received a check. The first checks came out on July 15th. The good news is you have free money flowing into your account. The bad news is that these payments are based on either your 2019 or 2020 tax return (depends on when you filed for 2020). You may have had changes since then, like fewer dependents or more income and thus a higher tax bracket, that would make these advanced payments inaccurate. When it comes time to file 2021 taxes any inaccuracies in the advanced payments will need to be trued up, meaning there could be some surprises when tax season rolls around in 2022.

Eligible families can receive up to $3,000 total for each child aged 6 to 17, and up to $3,600 total for each child 5 and younger. The credit is divided up: half through monthly payments in 2021 and the other half as a tax refund in 2022. If you receive the monthly payments from July -December, your child tax credit on your 2021 tax return will only be half of what it normally would be. Take for example a couple with 2 children under 17 who would normally get $2,000 for each child resulting in a $4,000 deduction. They may now get payments from July-December of $333 a month, however their end of year credit on their 2021 tax return will only be $2,000, not $4,000. If their income increased in 2021 they might have some of their credit phased-out, which means they would owe back a portion of what they were advanced.

Speaking of phase outs, here are the levels at which the 2021 child tax credit starts to reduce:

$75,000 for individual taxpayers
$112,500 for Heads of Household
$150,000 for married taxpayers filing jointly, and widowers

The credit is reduced by $50 for every additional $1,000 of adjusted gross income earned. For individuals making more than $95,000 and joint filers making more than $170,00, the credit for children ages 6-17 will be phased out completely.

Families earning up to $200,000 (or $400,000 for married couples filing jointly) will still be able to claim the standard $2,000 per child credit- half of this is also being sent in advance. 

Here is a tool you can use to estimate your child tax credit. The manage your payments, to check eligibility or to file your information click here.

How to Check on Your Refund

If you are owed a refund and haven’t received it yet your best option might be to just wait. While you could try calling the IRS to check your status, the IRS received 167 million calls this tax season, which is four times the number of calls in 2019. And based on the recent report, only seven percent of calls reached a telephone agent for help.  Even though the chances of getting live assistance are slim, the number to call is 800-829-1040 or try live phone assistance .  Just be prepared to be on hold for an extended period of time. You shouldn’t call if it’s been less than 21 days since you filed online (you have to give them a chance). A better option than calling might be to check your refund status here.

At Sound Accounting we are monitoring developments at the IRS on an ongoing basis and will continue to keep you informed of material changes and issues. If you have tax questions or concerns feel free to call us at 631.675.0967.

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