IRS Extends Tax Filing Deadline to May 17
On March 17, the IRS announced it would extend the deadline to file 2020 taxes for all Americans to May 17, giving taxpayers an additional month to file returns. This extended deadline is welcome news for individuals, businesses and CPA firms like S&K, as this tax season has quickly become one of the more complicated on record. With the recent stimulus legislation signed into law last week, which includes the mailing of a third round of stimulus checks to millions of desperate American households over the next few weeks, this move by the IRS is not surprising as they are extremely busy.
That said, the changes in the tax law mean that some of our clients will need to fill out updated forms and/or possibly resubmit their 2020 tax returns. If you received unemployment benefits in 2020 and did not claim them on the tax forms we already submitted for you, we will need to amend those forms and file again.
Increased Child Tax Credit Deduction
An important provision in the American Rescue Plan, signed into law by President Biden earlier this month, expands the child tax credit for one year and makes it fully refundable.
For 2020 tax returns filed this year, the child tax credit is worth $2,000 per child under the age of 17 whom you claim as a dependent and who has a Social Security number. To qualify, the child must be related to you and generally live with you for at least six months during the year. The credit begins to phase out if your adjusted gross income (AGI) is above $400,000 on a joint return, or over $200,000 on a single or head-of-household return. Up to $1,400 of the child credit is refundable for some lower-income individuals with children, but these people must also have earned income of at least $2,500 to get a refund.
The American Rescue Plan temporarily expands the child tax credit for 2021. First, 17-year-old dependents can qualify. Second, the credit is increased to $3,000 per child ($3,600 per child under age 6) for many families. Third, the $2,500 earnings floor is removed. Fourth, the credit is fully refundable. And fifth, half of the credit can be received in advance by having the IRS send periodic payments to families from July 2021 to December 2021.
Not all families with children will qualify for the higher child credit in 2021, however. The enhanced tax break begins to phase out at AGIs of $75,000 on single returns; $112,500 on head-of-household returns, and $150,000 on joint returns. Families who are not eligible for the higher child credit for 2021 would still claim the regular credit of $2,000 per child, less the amount of any monthly payments they received, subject to the $400,000/$200,000 AGI threshold limits.
With regard to advance payments, the American Rescue Plan calls for the IRS to send out a check (mainly in the form of direct deposits) periodically from July 2021 through December 2021 to eligible families. The hope is that the IRS will send the payments monthly for a total of six advance payments. These payments would account for half of the family’s 2021 child tax credit.
For example, if monthly payments were made, this would result in payments of up to $250 per child ($300 per child under age 6) for six months and would be a nice windfall for many families. Take a family of five with three children ages 12, 7 and 5. Assuming the family qualifies for the higher child credit and does not opt out of the advance payments, they could receive $800 per month from the IRS from July through December, for a total of $4,800. They would then claim the additional $4,800 in child tax credits when they file their 2021 return next year. To determine eligibility for the advance payments, the IRS would first look to the 2020 return. If a 2020 return has not yet been filed, the IRS would then look to 2019 returns.
As discussed above, lawmakers expect the IRS to start making the advance child credit payments to eligible Americans in July. The IRS will also be developing an online portal so that individuals can update their income, marital status, and the number of qualifying children. Taxpayers who want to opt out of the advance payments and instead take the full child credit on their 2021 return will be able to do so through the portal.