There’s no such thing as a free lunch, and nowhere is this truer than at the IRS. Earlier in the year, I wrote an article about understanding the increases to the child tax credit as part of the American Rescue Plan. It appears that for some Americans and New Jerseyans, it was too good to be true.
At the time, I had recommended that parents and taxpayers opt-out of monthly checks and instead wait for a lump-sum credit to be applied to their taxes due come tax time, 2022.
I’m beyond glad this was the move I advocated, as it now appears that some who meet certain financial conditions will end up owing money.
How does that happen? Am I included in this group? What’s going on here?!
Please, be calm, patient, and I will walk you through everything you need to know about how the increased Child Tax Credit can and will affect how you file your 2021 taxes.
How Did I Qualify For the Child Tax Credit but Now Owe Because I Took it?
The qualification standards for the bolstered CTC payments were based on taxpayers’ 2020 income, a year in which many people earned less than they normally would have. With taxes coming due for 2021, your income may exceed the threshold for the increased payments.
The income limits to receive the extra CTC were $75,000 per individual and $150,000 per family. If you were among the many that earned less in 2020 but rebounded financially in 2021, in the eyes of the IRS, you took money that you weren’t entitled to.
While this is inarguably obnoxious, it’s not quite at the level of “tomfoolery.” The IRS has to draw cutoff lines in terms of income, dates, and it sometimes happens that individuals find themselves earning the wrong amount of money at the wrong time.
What Is Letter 6419, and How Do I Prepare For My 2021 Taxes?
Letter 6419 is a document currently being sent out to recipients of the CTC from the IRS. If you haven’t received it already, you should expect to receive it before January has ended. This letter details all the CTC payments you received and will guide you on how to proceed as you do your taxes.
Whether you do your own taxes or rely on a tax professional to file on your behalf, you’re going to need this letter. Don’t toss it; it’s one of those documents that’s a crucial piece of the puzzle if you’re intent on doing your taxes properly. The information on Letter 6419 will be required to properly fill out Schedule 8812 (Form 1040).
The IRS recently posted guidance regarding this letter on their site. Just in case what I said about saving the letter wasn’t clear, directly quoting the IRS from that link, “People receiving these letters should keep them. Do not throw them away.”
That’s an inordinate level of clarity regarding anything from the IRS, and it’s advice that’s best followed. They also put it in bold; that wasn’t a creative choice on my part.
Furthermore, if you’re anxious to make financial sense of what’s going on and don’t want to wait on that letter, you can visit one of the IRS portals here to see the history of CTC payments made to you and/or your significant other.
It’s been a busy year, yes, another one, so it’s understandable if you can’t remember whether you received these payments or not.
I myself had to utilize the IRS’ services to see which stimulus payments I got and which I missed out on. It’s hard to believe how easy it is to forget getting paid, but it happens.
How Did the Increased Child Tax Credit Work, Again?
As part of the American Rescue Plan, the increases to the CTC took effect halfway into 2021, with most payments starting in July. The second half of the payments were to be applied to the filer’s 2021 taxes in the form of a deduction or refund, depending on the circumstances of the person or couple filing.
The way it worked was that those with incomes under the threshold mentioned above (75k/150k) were entitled to monthly payments of either $300 or $250, depending on whether the child was younger or older than five years.
This was an increase from the $2,000 CTC of years prior to the American Rescue Plan, an increase of anywhere from $1,000 to $1,600, depending on the situation of the person filing.
Do I Have the Option of Doing Nothing?
No, you have to respond to this. Whether you’re going to benefit from the CTC and get the second half of your credit or are among the unfortunates who will need to give the money back, you need to get that 8812 filled out. Either way, doing nothing is bad news and is best avoided by just taking the tough medicine of yet another form to fill out. Fortunately, any good tax professional will help you get this done in no time, and it won’t be a big deal!