Some tax pros may advise most of their clients to opt out of the new periodic advance child tax credit (CTC) payments for fear that reconciling it on next year’s return could inadvertently lead to a tax bill.
“I’m certainly leaning toward having clients opting out of” the periodic advance CTC program, enrolled agent Terry Durkin said during a May 18 Tax Talk Today webcast on personal tax credits. “It will make sense for some, but I would say the majority I would be promoting to opt out when that is available.”
The IRS confirmed May 17 that it would begin July 15 sending taxpayers with eligible children either three or six advance CTC payments through the end of 2021.
The payments will total up to half the taxpayer’s anticipated 2021 CTC refund based on their 2020 tax return.
The IRS also plans to launch a web portal for taxpayers to notify the agency of changes in their family circumstances that could affect their CTC payments, or to opt out of them.
Tax Talk Today moderator Alan Pinck of A. Pinck & Associates noted that the IRS distributed monthly advance earned income tax credit payments until 2010.
Enrolled agent Phyllis Jo Kubey agreed that tax practitioners should view advance CTC payments with caution.
“Unless a client is really experiencing financial hardship and this money will really make a difference to them if they get it in advance, I think I’m leaning toward opting out for most of my clients,” Kubey said.
Family Issues
“There are still information gaps about how this whole advance payment and child tax credit is going to work out,” Joseph McCarthy, a tax specialist in the IRS’s Communications and Liaison Office, said on the webcast.
McCarthy recommended that tax practitioners subscribe to IRS email updates and frequently check the IRS webpages dedicated to the new program.
Kubey noted that sections 9611 and 9612 of the American Rescue Plan Act of 2021 (P.L. 117-2) on the CTC changes “are pretty concise, but they have a lot of information.” Many difficulties for clients and tax practitioners arise less from the law and more from the complexity and fluidity of the American family relationships to which the law must be applied, tax professionals agreed.
Durkin, of Durkin Associates Tax Services, said she was especially concerned for taxpayers who lost a dependent in 2020 or whose income is higher in 2021 because calculations based on their 2020 return while getting CTC advances will be different on the client’s 2021 return, necessitating repayment of some or all of the payments.
Kubey said forgoing the advance CTC payments could help taxpayers facing estimated tax penalties. The whole advance CTC should show up on 2021 returns as a payment on the return. Payments such as withholding are considered paid through the year, and the CTC could mitigate estimated tax penalties if there’s a shortfall, she said.
Durkin said that after a breather following the May 17 individual tax return deadline, the IRS and the tax community need to get the word out to taxpayers about the new program and their most tax-favorable options.
Kubey said practitioners should also closely monitor IRS webpages and email communications for CTC updates, “because there will be a lot.”
Pinck noted that with the July 15 distribution deadline looming, clients will need to move quickly if they want to opt out of the advance CTC.
“As we’ve seen, the IRS is doing everything they can to stay up with it,” Pinck said. “But unfortunately there’s only so much bandwidth that’s available to them to do that.”