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September 21, 2021 ABA Tax Times

The Incompetent Authority: Questions and Answers

By Andy Howlett, Miller & Chevalier, Washington, DC and Guinevere Moore, Moore Tax Law Group, LLC, Chicago, IL

The Incompetent Authority: Questions and Answers, provides some useful responses to your questions about the mysteries of the tax profession, including tax career, business of tax, tax ethics, and other burning tax questions. If we don’t know the answer, we know who to ask. And we hope to offer the answer with a touch of humor. Of course, the standard disclaimer applies: this column does not dispense individualized tax advice, but merely presents the considered views of the writers about tax topics of general interest to the readers.

Andy Howlett is a member at the law firm of Miller & Chevalier in Washington D.C. He focuses his practice on tax planning and helps his clients understand and plan for the federal tax consequences of a wide range of transaction. He is married with two children, all of which made sense from a tax perspective at the time.

Guinevere Moore is the Managing Member of Moore Tax Law Group, LLC in Chicago. She’s worked at big shops (both accounting and law firms) but has found true tax bliss at her small firm. She is married with four children, all of whom are still young enough to want to spend time with her. Her favorite section of the Internal Revenue Code is § 7430. Obviously.

Dear Incompetent Authority,

Starting in July I began receiving monthly payments from the IRS made directly into my checking account. I think that these payments are part of the new child tax credit. How long will I receive them, and is there a chance that I’ll have to pay them back?

– Rolling In It

Dear Rolling In It:

Short answer: Not clear, maybe, we’ll see.

Slightly longer answer: The section 24 Child Tax Credit (CTC) has been part of the Tax Code since the 1990s, but the American Rescue Plan (ARP) signed into law by President Biden in March super-charges it. First and foremost, the ARP dramatically expands both the amount and the eligibility for the CTC. Thanks to the new law, the amount of the credit is now $3,000 per qualifying child (even more—$3,600—in the case of a child who is under six). The revised credit is also now available for 17-year-olds and at higher income levels, with phaseouts beginning at $150,000 in the case of joint returns and surviving spouses. These numbers apply for the 2021 tax year only—more on that in a second.

So you wonder why you are getting money now? The ARP added new section 7527A to the Code. Boy, is it complex! In a nutshell, section 7527A directs the IRS to “establish a program for making periodic payments to taxpayers, which in the aggregate during any calendar year, equal the annual advance amount determined with respect to such taxpayer for such calendar year.” We read on to find that the annual advance amount of the CTC is essentially 50 percent of what the taxpayer’s full CTC would be based on certain characteristics (age and number of kids, income, marital status) determined as of the previous taxable year. The IRS did as it was bid, and checks started rolling out in July.

Because the payments are to be estimated based on prior tax year information, there is a chance that they are overstated. Indeed, new section 24(j) provides that any “excess” advance payments will be treated as an increase in tax in 2021. There is, however, a safe harbor that will limit (and in some cases, eliminate) the amount that taxpayers in certain income ranges will have to “pay back”: the safe harbor applies in cases where the excess was a result of having a child who qualified in 2020 but did not qualify in 2021.

So it’s really hard to say if you’ll have to pay any of that money back, Rolling In It, just from your initial query. Much depends on how your 2021 tax situation compares to 2020. Did you have any more kids? Did any of your children turn 18 this year? (We must note that whether they actually move out upon turning 18 is, sadly, irrelevant.) What about your income? Did something unusual such as large lottery winnings put you into the phaseout range? These are, as they say, the questions that must be asked.

And what about the future? If Congress does nothing—some would say that’s usually a good bet—then the CTC goes back to “normal” for 2022 (which itself reflects an expansion that was part of the Consolidated Appropriations Act of 2018, with credits maxing out at $2,000 per kid). But expect large pressure to keep the expanded CTC going. The Biden administration has identified making the expanded CTC permanent as a major priority in its Green Book (now, sadly available to the general public only as a black and white PDF, so much for “Building Back Better”). In the fine print is a directive for the Treasury and IRS to “develop strategies to minimize the amount of advance CTC payments that is paid to individuals who are ultimately not eligible for the credit [which] will include additional statutory recommendations, regulatory changes, data collection, and data matching.”

Incompetent Authority has plenty of kids and thus, like you, enjoys getting “free” money. Moreover, it’s a lot easier on our nanny and our bookie if we can get payments monthly rather than when we file our return in, er, April. We say keep that kid money flowing!

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