Navigating the New 2021 Child Tax Credit

The whirlwind of tax changes just keeps going. Now, if you have children 17 or under there is a new, higher child tax credit in place for 2021. Here is what you need to know:

Age matters. The old credit was for children under the age of 17. The new credit goes through age 17 and includes an increased credit for children under the age of 6.

The new credit amount. The child tax credit goes from $2,000 per qualifying child up to $3,000 per child. The amount increases to $3,600 per child if your child is under the age of six.

Fully refundable. You will get the child tax credit even if you do not owe tax. The old rules required $2,500 in minimum earnings and only up to $1,400 of the credit was refundable.

Phaseouts just got a lot more complicated. As with the past child tax credit, you can only receive the credit if your income is below a threshold amount. The $200,000 threshold for unmarried taxpayers and $400,000 threshold for married taxpayers is still in place for the first $2,000 of the 2021 credit. To get the entire $3,000 or $3,600 credit in 2021, your adjusted gross income must be under $75,000 for single taxpayers, $112,500 for head of household taxpayers, and $150,000 for married taxpayers.

New periodic payments. The new child tax credit also allows you to receive monthly payments for 50 percent of the credit from July 2021 through December 2021. There will be a new IRS website to opt-out of receiving monthly payments if you prefer to receive your entire child tax credit when you file your 2021 tax return in 2022. Find the new website here and the dates to opt-out from monthly payments.

Unless noted, the other requirements to receive the child tax credit stay in place. So you must still pass rules for the relationship test and support tests to qualify. As always, should you have questions please feel free to contact us. And remember, this advice is general and not meant to be taken into account without talking to your tax advisor about your own individual circumstances.

Remember folks, never take advice from strangers on the internet! Always talk to your own tax preparer about your specific situation. These posts are meant to educate and inform, and aren't to be taken as actionable advice.

35 Million: The Total Backlog of Tax Returns The IRS Had At The End Of Tax Season

The Internal Revenue Service has released a midyear report to Congress that details a significant backlog of tax returns dating back to the end of tax filing season, and many of those returns have yet to be processed. While backlogs are not unusual, this year’s is far greater than in previous years.

That’s bad news for those taxpayers who are eagerly waiting for tax refunds. For tax year 2020, roughly 70 percent of the individual returns that have already been processed have resulted in refunds being paid. Those refunds have averaged $2,827.00, but there were still more than 35 million returns for last year that had not yet been addressed by mid-May. An independent advocacy group within the IRS says that at the same point in time the previous year, there were a third the number of backlogged returns as now.

In writing the report, national taxpayer advocate Erin M. Collins said, “For taxpayers who can afford to wait, the best advice is to be patient and give the I.R.S. time to work through its processing backlog. But particularly for low-income taxpayers and small businesses operating on the margin, refund delays can impose significant financial hardships.”

The agency issued a statement indicating that by June 18th, two months after the official filing deadline, almost seven million individual tax returns had been processed bringing the backlog down to near 28 million. Their work is ongoing continuously, addressing both current returns, those from previous years, and amended returns.  More than twice that many are currently being processed. 

Backlogs have been a problem in the past, but an evacuation order issued as a result of the pandemic kept IRS employees out of processing facilities, and that and the need to incorporate new tax legislation passed for the 2021 filing season has made things far worse. The agency was also responsible for sending out the third stimulus payment, bringing the total value of payments to $807 billion and the number processed over a 15-month period to 475 million. 

While 2019 saw a backlog of 7.4 million returns at the close of tax filing season and 2020’s backlog reached 10.7 million, 2021’s 35 million return backlog has led to several recommendations and objectives being issued to improve things in the future.

A large number of tax returns were processed before the tax filing deadline, and of those 136 million returns, 96 million required that refunds totaling about $270 billion be paid. Both individual returns and business returns are included in the 35.3 million that still need to be processed, and those in the backlog all require additional intervention from an IRS employee in order to be processed.

So what does this all mean for you, the taxpayer? It means get out your patience and hold on! The IRS will get to your return, but with Covid back on the rise with the Delta variant and a new tax season on the horizon, things will likely get worse before they get better. 

To check on your return you can pull your transcripts on irs.gov once you login to your account. You can also use the Refunds Tool on irs.gov. 

Remember folks, never take advice from strangers on the internet! Always talk to your own tax preparer about your specific situation. These posts are meant to educate and inform, and aren't to be taken as actionable advice.

Understanding Tax Terms: Installment Sales

If you use an installment sale to help sell property, you can benefit from tax deferral and possibly lower your overall tax bill. But you need to watch out for certain tax traps if you do.

Installment sale defined

Generally, you create an installment sale when you receive payments for sold property in the tax year of the sale and at least one other tax year. For instance, if you sell real estate for a profit in 2021 and receive payments in 2021 through 2026, your real estate transaction is an installment sale.

Tax implications

An installment sale creates a tax event in each year you receive payments. In the above example, part of your gain is taxable in 2021 and each year through 2026.

Note that property held longer than one year qualifies for favorable capital gains tax treatment. The current tax rate on long-term capital gains is from 0 to 20 percent, compared with the top ordinary income tax bracket of 37 percent.

You also have the ability to pay all the tax due on the sale up-front, to avoid paying tax on the installments in future years. In some cases you'll reduce your overall tax bill this way, though it may require some help with tax planning.

Benefits of an installment sale

With an installment sale, you may be able to lower your total tax on the sale of the property by spreading this income out over several years. In addition, the buyer will often pay a rate of interest to you higher than a typical bank loan for the remainder of the amount due.

Installment sale tax traps

Related parties caution. If you sell property to a related party and the property is then disposed of within two years, in most cases, all the remaining tax comes due immediately. The tax law definition of related parties is more expansive than you might think. It includes:

• Spouses

• Children

• Grandchildren

• Siblings

• Parents

• A partnership or corporation in which you have a controlling interest

• An estate or trust you’re connected to

To avoid this major tax surprise, consider stipulating in the contract that the property can’t be disposed of within two years.

Depreciation recapture potential. Also, be cautious if you took any depreciation on the property in prior years. In some circumstances, you will owe extra tax related to that depreciation when you sell the property.

Gains not losses. Be aware that installment sale treatment is only available for gains, not losses. Other special rules may apply, so reach out if you need advice specific to your situation.

Of course, tax discussions now in Congress might impact how installment sales and long-term capital gains are taxed in the future. If you're planning an installment sale, consider reaching out for a consultation to discuss the tax implications.