This weekend came a report from a branch called BGR Media about the child tax credits that are expected to go into bank accounts over the next few weeks. In contrast to all its predecessors, this child tax credit is paid out in advance to the entitled recipients; usually at a cost of $ 250 to $ 300 per month, depending on the age of the child. Streams of electronic ink have been spilled over it, and as we wrote on May 18, 2021, this creates a business for lawyers because arguing over it is a new thing for divorced couples. We warned then and now that it may be the lawyers and accountants who will benefit most from this subsidy that is “designed” to help low paid workers.
Well, like all “free lunches”, the food smells like it’s been left out for too long. According to the BGR experts, your monthly tax credit only works if you have to credit income tax at the end of the year. Many people on modest incomes often use their federal tax withholding to build a small surplus; trigger a tax refund when they file in the next year. These individuals may find their loan needs to be repaid to the government unless they have a federal tax on April 15, 2022. How about a carryover to the following tax year? It’s not structured like that now.
In practical terms, here’s the catch. As of July, the IRS will send you $ 250- $ 300 per month. So your bank account will receive $ 1500-1800 by the end of the year on December 31st. It was designed to help people pay their bills and most people will use it that way. But wait. Let’s say you have a history of estimating your taxes due and calibrating your withholding tax to -0- each tax year. You owe nothing to the IRS. You have no refund due. Based on the current interpretation of the tax law, you owe the government $ 1,500 to $ 1,800 when you file. To put it another way, the IRS will lend you money until next April. If you owe the government $ 1500-1800 on April 15, your tax credit will destroy your “debt.” But otherwise your loan is due and you have to repay the incentive.
What is the solution? Perhaps stay out of the program altogether, or if you’ve already signed up, keep your monthly scholarship in the bank so it can be repaid. Like so many other tax policies enacted in recent years, Congress appears to be paying little attention to what it is doing while Washington trumpets that it is answering the call of the people adversely affected by the 2020 pandemic. This seems like a pretty pathetic answer that can cause more economic stress than good.
We note that the Common Pleas Court of Berks County has ruled that incentive payments under the CARES Act (which is the first incentive passed in March 2020) are not income for the calculation of assistance. The case is Amos v. Riversa, 113 Berks 107 (December 16, 2020).
Click here for the IRS link to assess your eligibility, but be aware that Step 1 may involve hiring your accountant to advise you on whether this program will pose a problem for you.