Tax professionals and their clients are dealing with extra challenges this tax season from tax breaks that ended last year and haven’t yet been extended, including the enhanced Child Tax Credit.
Around 40 tax provisions affecting individuals or businesses expired in 2021, six of which ended after the third quarter and 34 at the end of the year. Some provisions were related to pandemic relief and arguably intended to expire at some point, while others are on the traditional list of “tax extenders” that get renewed by Congress, sometimes retroactively. Congress’s Joint Committee on Taxation regularly updates
The legislative practice often leads to uncertainty, anxiety and confusion for many taxpayers, including businesses and individuals.
“It’s interesting to see there are 40 provisions in 2021 alone, and many of them are not very common, but some that we see that have a larger impact are the expanded Child Tax Credit,” said Michael Prinzo, managing principal of tax at CliftonLarsonAllen in Denver. “That one is obviously impacting a large number of taxpayers, and having a significant price tag associated with it, which is one of the items that created some consternation during the negotiations with Build Back Better. That is one that we see commonly.”
The Biden administration’s Build Back Better Act aimed to extend the beefed-up Child Tax Credit that was included in the American Rescue Plan last year. It provided monthly advance payments of $250 to $300 per child, depending on their age, while increasing the total amount per year from $2,000 to up to $3,000 or $3,600 per child, again depending on their age. But after the Build Back Better Act stalled in the Senate, the limit went back to $2,000 and the monthly payments went away.
Phaseouts have been another complicating factor for the Child Tax Credit. “What’s complicated is there are two sets of phaseouts,” said Brent Lipschultz, a partner in the Personal Wealth Advisors Group at EisnerAmper in New York. “One phaseout deals with the pre-2021 Child Tax Credit of $2,000 for kids, but there’s another phaseout dealing with the Additional Child Tax Credit. It was a total of $3,600, and there’s an even higher tax credit for a child who is under the age of five, so it’s $3,600 for children ages five and under at the end of 2021, and $3,000 for children ages six through 17. Seventeen is new. It used to be six through 16. Then there are two phaseouts on that. There’s a phaseout for the $2,000, and then there’s a phaseout for the additional $1,000 or the additional $1,600 that they’re giving for these children.”
Lipschultz believes the phaseouts are making the returns much more complicated. “In my view, it should have been just one phaseout. Clients can’t do it themselves anymore,” he said. “It’s too complicated, or they have to rely on tax software that does it for them. There’s a form you have to fill out. There’s a Schedule 8812 that deals with the Child Tax Credit and the reconciliation of the advance payments to the return. Even if you don’t have a return filing obligation, you still have to complete that form in order to reconcile the advance payments with what was actually provided to the taxpayer.”
Parents are disappointed when they discover they may need to repay some of the advance payments of the Child Tax Credit, or their tax refund is smaller.
“A lot of people are upset,” said Donald Williams, CEO of Williams Accounting & Consulting in Atlanta. “That’s where the biggest fight is. A lot of people say, ‘Hey, they gave me this money. I didn’t ask them for it.’ But I expressed to them, ‘You could have refused it.’ And then they’re asking, ‘Why do I have to pay taxes on it? And I explain to them that you’re not paying taxes on this money. Then they ask, ‘Then why do I have to give it back?’ Because it’s an advance.”
He has to explain to clients that the money was intended to aid them and the economy during the pandemic, but they are disappointed at tax time to discover that they won’t be getting the larger tax refund they were expecting.
“It’s the same money, but they just gave it to you in advance in increments, and the problem is a lot of people are upset because their hopes were to get a large refund,” said Williams. “People plan things to do with their refund. People plan to buy a car, to buy furniture, because their refund is more like a savings account for them. A lot of individuals live paycheck to paycheck, so their refunds help them to get ahead. When you tell them they’re only getting $500 on the refund, but they got an advance of $3,000, now your refund is $2,000, it’s causing a lot of financial stress on people because they had other plans and they weren’t fully educated on the advance Child Tax Credit.”
Other parents have been distressed about the abrupt end of the monthly advance payments. A new study found that child poverty spiked by 41% in January, right after the expanded Child Tax Credit expired, leaving 3.7 million more children in poverty without the monthly CTC.
ParentsTogether, a family advocacy group with more than 3 million parent members nationwide, released
The enhanced Child Tax Credit is probably the highest profile tax break that either ended last year or went back to its pre-pandemic size. But there were dozens of others.
“There are a number of credits for energy efficient investments and purchases that also expired at the end of 2021,” said Prinzo. “One that received significant press over the past couple of years was charitable contributions for nonitemizers. For example, if an individual was taking the standard deduction because that was greatly expanded under the 2017 Tax Cuts and Jobs Act, there was a carveout where individuals could get a benefit, even if they didn’t itemize, for some of their philanthropic giving. That also expired at the end of 2021. We would call it an above the line deduction. You didn’t need to itemize for your charitable contribution deductions in order to take advantage of that benefit. That was one of the ones we saw go away at the end of 2021 as well.”
The tax break allowed individuals who claim the standard deduction to deduct up to $300 for charitable contributions and couples to deduct $600 without itemizing.
Congress may decide to extend some of the expiring provisions, perhaps even retroactively as it has in the past. “Several times we’ve seen where several of these provisions have fallen off and not been available during the year, or even late in the year, or even into the following year a retroactive adjustment is possible,” said Prinzo. “Many of these items are rooted in incentivizing taxpayer behavior. Some of the energy efficient provisions really are wrapped up in that, in trying to help us move forward in the types of vehicles that maybe are purchased, that have a lower carbon footprint or maybe buildings that are built. There are provisions layered into the tax law that help to incentivize those types of products.”
However, with the midterm elections approaching in the fall, it may be difficult for Congress to agree until after the election on what to do with them, perhaps in a year-end package.
“It seems like there’s been some discussion around maybe smaller pieces of what was included in Build Back Better,” said Prinzo. “Obviously, it’s a tough road for substantial tax legislation, given it’s an election year, but it’s certainly a possibility for some of those to be retroactively reenacted in some smaller tax legislation this year.”
