The coronavirus pandemic has eased substantially across the nation as the economy opens up. But the tax ramifications from it are still reverberating.
Among the changes: The Internal Revenue Service has started to issue refunds to millions of Americans in two separate areas – unemployment benefits and child tax credits. The changes are tied to unusual provisions adopted in part to relieve the financial stress caused by the pandemic.
The IRS also is reminding self-employed people that they might have a deferred tax payment due later this year — also courtesy of COVID-19 relief legislation.
Unemployment refunds arriving
The IRS has started to issue refunds averaging $1,265 to nearly 4 million taxpayers who received unemployment compensation last year. Others won’t get payments but will benefit from adjustments lowering their outstanding tax bills.
Unemployment benefits normally are taxable, but coronavirus-relief legislation allowed lower- and moderate-income households to receive up to $10,200 in jobless aid on a tax-free basis. This exclusion applied for individuals and married couples with modified adjusted gross income below $150,000.
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The American Rescue Plan was enacted in March, after millions of Americans already had filed their 2020 returns, necessitating an adjustment that the IRS mostly made without requiring action by affected taxpayers.
Refunds by direct deposit began July 14, and the IRS started sending paper-check refunds on July 16. Refunds will continue throughout summer but in some cases will be applied to outstanding tax bills or other federal or state debts owed.
For the current round, the IRS identified roughly 4.6 million taxpayers due an adjustment, of whom about 4 million will receive a refund. The IRS issued 2.8 million similar refunds in June. Ultimately, around 13 million taxpayers could benefit.
As noted, most people don’t need to take any action, as the IRS has calculated the correct taxable amount on jobless benefits and the resulting tax impact. But some people might want to file an amended return if the excluded jobless income means they now might be eligible for deductions or credits they didn’t earlier claim. Examples cited by the IRS include the additional child tax credit and the earned income tax credit.
In addition to refunds, taxpayers can expect to receive letters from the IRS within 30 days of the adjustment, informing them of the action taken.
Child tax-credit payments coming
The IRS also has started to issue refunds tied to the child tax credit.
This is a potentially confusing situation since credits increased from last year, with some amounts paid in advance over the second half of this year. This is a big initiative, with credits available for families of more than 59 million children (including 1.4 million in Arizona). However, public awareness of the changes is lacking, surveys show.
Tiffany Jarrett, a single mom from Chandler, said she’s looking forward to the expanded child tax credit to help pay for groceries and other basic expenses for herself and her son and daughter, both teens. She also plans to use some of the money for extracurricular-type programs to keep her kids busy.
An accountant who works for a law firm, Jarrett said she lost some work hours during the pandemic when court activities were pared back. She said the credit payments will help, though she wasn’t sure how much her family would receive.
“The cost of everything is going up,” said Jarrett, 46. “But pay isn’t going up.”
For kids under 6, the credit amount increased from a maximum $2,000 per child in 2020 to $3,600 this year. For ages 6 to 16, it’s up to $3,000 from $2,000 previously. The law also made 17-year-olds eligible for the $3,000 credit. Credits and eligibility phase out for people in higher-income groups.
In another switch, half the yearly amounts are being paid in advance and spread over the final six months of 2021. That means families have started to receive payments of up to $300 per month per child for kids under 6 and $250 for those 6 through 17. The IRS is basing the advance payments on information on a household’s 2020 tax return, if available, or on 2019 tax returns. Filers would claim the remaining credit amount when submitting 2021 tax returns next year.
Some recipients might ultimately need to repay some of the advance payments if they exceed the credit amount to which they’re entitled. That would happen when filing 2021 income-tax returns next year.
In fact, some taxpayers might want to opt out of receiving advance payments if, for example, they know they won’t be eligible based on their projected 2021 income, noted Mark Luscombe, a principal federal tax analyst at Wolters Kluwers. Taxpayers can opt out through the child tax credit update portal at irs.gov. But opt-out deadlines are set near the start of each month, so it’s too late to cancel July payments.
Social Security payment reminder
The CARES Act enacted last year to provide coronavirus relief allowed self-employed people to delay the payment of Social Security tax that was due in 2020 for two years. Specifically, individuals were allowed to defer 50% of the Social Security tax on self-employed income earned from March 27, 2020, through Dec. 31, 2020.
Apparently concerned that many people might have trouble making these payments, the IRS recently issued an early reminder that half of any deferred Social Security tax is due on Dec. 31, 2021. The other half will come due Dec. 31, 2022.
Self-employed individuals may make these payments anytime on or before the due dates and in various manners, including by check or credit card. To ensure they are applied correctly, the payments should be noted as a “deferred Social Security tax” and made separate from other tax payments.
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This article originally appeared on Arizona Republic: Beyond child tax credit: How the COVID-19 pandemic changed tax laws