Neilley & Co. CPA Blog
- Written by Grant Neilley
- Published: Jan 12, 2022
Watch for letters IRS is mailing in January regarding any Recovery Rebate Payment or Advance Child Tax Credit Payments you received. Send us copies along with your other tax information to guard against reporting errors and unnecessary delays with your 2021 return.
The general consensus among tax professionals is that these payments are going to cause a lot of reporting problems this year. There could be confusion with both of them since the advance child credit payments may have changed from one month to the next, and the stimulus check may have come in two installments for some taxpayers. Any discrepancy between what you report in your return vs. IRS’s records could mean a 6-10 month or longer delay in IRS processing your tax return and any refund you may be due, or an additional tax assessment later. Some folks who filed last spring are just now getting their 2020 refunds, and millions of returns remain unprocessed, many we suspect due to issues with last year’s Recovery Rebate.
Recovery Rebate Checks
This month, IRS is mailing Letter 6475 to everyone who received a third-round Recovery Rebate in 2021. Not to be confused with the second round payments which generally came in February, third round payments began in March and ran into late fall, and sometimes came in more than one installment. Based on our experience with last year’s returns, reporting errors may occur if you rely solely on your memory, so please be sure to include Letter 6475 with this year’s tax materials.
Advance Child Tax Credit (ACTC)
IRS is also mailing Letter 6419 to everyone who received any amount of ACTC payments. These were made on the 15th day of every month from July through December. You may not have received one every month if you filed your 2020 return after May, or you opted out of the payments part way through. Payment amounts may also have changed from one month to another for a variety of reasons.
IRS made these payments via direct deposit, paper checks, and prepaid debit cards. Sometimes the payment method even changed mid-stream. Many who received the debit cards thought they were some sort of scam or junk mail and threw them away. And having been mailed, there’s no guarantee you even received every payment if it came via check or debit card, yet IRS records will show that you did.
There are so many ways this could go wrong, so if you received any ACTC payments, please be sure to include Letter 6419 with this year’s tax materials, along with Letter 6475 for your stimulus payment.
- Written by Grant Neilley
- Published: Jul 08, 2021
Millions of taxpayers have been receiving multiple government payments in the name of COVID relief, some with more yet to come. Whether you smile or frown when these payments hit your bank account, there are some important details you need to know.
It all started with the CARES Act in March of 2020, which directed IRS to issue $1,200 payments to adult taxpayers, plus another $500 per dependent under age 17. These were officially known as Economic Impact Payments (EIPs), but also commonly referred to as recovery rebates or stimulus checks.
These were expanded in December with another round of $600 per person including dependents, again under age 17 (EIP-2). Then in March of 2021, the American Rescue Plan Act (ARPA) created a third round of payments (EIP-3) of $1,400 per person, this time including dependents of any age.
The first two rounds were actually an estimated advance payment of a 2020 tax year credit, and the third is for 2021. When you file each year’s return, you reconcile what you got vs. what you’re eligible for based on the final return, and possibly receive an additional credit; if you’re entitled to less, you don’t have to pay it back. So, while these payments aren’t taxable in any way, you do need to know how much you received in order to determine an additional credit, if eligible.
But wait, there’s more!
ARPA also significantly expanded the child tax credit. For 2021 only, instead of the previous $2,000 per dependent under age 17, the credit can be as much as $3,000 per dependent under age 18… $3,600 if they’re under age 6. And this time, the credit is fully refundable, rather than only offsetting your tax liability as before. For 2022, the credit will revert to 2020 levels and rules.
Rather than wait until 2021 tax returns are filed for taxpayers to benefit from these changes, ARPA directed IRS to begin making advance payments to eligible taxpayers of half the projected credit, divided into 6 monthly installments from July through December. These advance payments will initially be based on either your 2019 or 2020 tax return, depending on when you file. As with the EIPs, taxpayers will reconcile whatever advance payments they receive on their 2021 tax returns, claiming any remaining credit on the return, so it’s important to keep track of how much you receive.
Unlike the EIPs however, you might need to pay back excess payments you receive. When you file your 2021 return, if your actual child credit is lower than the IRS projected and you received too much, you may need to repay the difference if your adjusted gross income is over $60,000 on a joint return, or $40,000 on a single/separate return. Remember that the advance payments will only be half of what the IRS is projecting, so there’s already some safety margin built in. In addition, “repayment” is a bit of a misnomer, as any excess will be treated as taxable income, not a literal payment due back. Increasing your income will of course increase your tax liability, but based on your tax bracket, not a dollar for dollar pay back. On the other hand, if the excess increases your adjusted gross income, that could have negative “trickle down” effects on other calculations in your federal return, and possibly increase your state income tax as well.
Also unlike the EIPs, you have the opportunity to adjust how much your advance payments will be, up or down. You may disenroll from the payments entirely, leaving your full credit in place to claim on your 2021 return. There could be some advantages to that. For example, if you are paying estimated tax payments, any reduction in your credit on the return will increase your tax and might require an adjustment to your quarterly payments, or possibly expose you to underpayment penalties. Or maybe you know something the IRS doesn’t, where you won’t be eligible for any credit for 2021 and want to avoid the negative implications of an excess payment.
You can also use a new adjustment tool on the IRS website (available soon) to increase or decrease your projected child credit. For example, perhaps you expect another child by the end of 2021, your marital status changes, or your 2021 income changes making you eligible for either a larger or smaller credit than predicted.
In any case, it’s important to keep track of the monthly payments you receive. You’ll need that information to reconcile your credit on the 2021 return. Especially pay close attention if the monthly payments change, either because they were initially based on your 2019 return and changed when you filed 2020, or because you requested an adjustment on the IRS website.
We’ve just hit the highlights of these payments, more information is available on the IRS website, www.irs.gov. For the child credit changes and advance payments specifically, https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
- Written by Grant Neilley
- Published: Mar 03, 2021
As a business owner, you may hire someone to straighten up your books and file your tax return each year. Is that all you’re getting from them? These basic services do indeed provide a layer of required compliance that is expected of all businesses, but in and of themselves, they don’t provide the kind of horsepower you need to face the difficult and weighty business decisions you regularly face. Here are some questions you might find yourself asking, with seemingly nowhere to turn for support:
What if I made this (fill-in-the-blank) strategic change, such as hiring more employees, opening a new location, buying a building or machinery, launching a new marketing campaign, adding another line of business, etc.? How will it impact my profitability, and what will it do to my cash flow? Are there other ways to approach this idea to lower risk, improve my cash position or increase odds of success? Does this decision create a short-term benefit at the expense of long-term stability? Where is the sweet spot to optimize all these factors? What’s my return on investment, and how long will it take to reach a break-even point? Should I get a loan to finance this decision? Can I even get a loan based on my business financials?
Notice the two words that start a typical line of questioning…What if?? Business leaders are regularly running “what-if” scenarios through their heads. The most successful leaders do more than that, they run them through other peoples’ heads as well, to get experienced and varied perspectives. This is the role of a trusted financial advisor. Large companies have CFOs filling this role for their CEOs. Smaller business CEOs need the same type of trained, experienced listeners to ponder ideas with.
Your spouse or friend may be a good listener and want to help you succeed, but he/she may or may not be adding to the conversation with active questioning, objective evaluation, suggestions for enhancement, alternative perspectives, analysis of likely impact, financing options, and the myriad other factors that make an advisor more than just a good listener. A good advisor will respectfully and constructively challenge your ideas and plans. The synergistic relationship will make your final decisions stronger than if you made them alone, and add confidence in carrying them out.
In some ways, the mid-sized company CEO is in the toughest spot. Are you leading a business that is too big to NOT have a CFO, but still too small to hire one full time? A trusted advisor relationship may be the missing piece of the puzzle for you.
At Neilley and Co., we seek to build advice-oriented relationships with enterprising growth-minded business owners. Let’s connect and explore the possibility of engaging as your trusted business advisor.