Here’s why that can be tricky. First, the credit is subject to not one, but two, phaseouts. Phaseouts mean that your payment will go down as your income goes up. And second, the IRS estimated the amounts due as advanced payments based on your 2019 or 2020 tax return, or information from the IRS Non-Filer tool.
That combination sets up some potentially complicated scenarios. If you made more or less money, added children, or changed your filing status, the needle could move on what you are actually due at tax time. Additionally, some taxpayers who opted out—like me—still received payments. And still other taxpayers claim they did not receive enough payments.
Remember: these payments are advances. When you file your 2021 return in 2022, you’ll figure the amount of credit you’re actually due. If the amount of your available credit is more than your advance payments, you can claim the remaining credit on your return—and you may be entitled to a refund. But the opposite is also true: You may have to pay back the extra if you received too much. The result is that your refund—if any—in 2022 could look different.
Tax Services Get Bundled
More than 55% of electronically filed tax returns were prepared by tax professionals. Many tax practitioners expect that proportion to increase as tax prep potentially grows more time-consuming and complicated with remote work, career moves, and other pandemic-related developments.
To help avoid surprises—like refund changes due to the advance child tax credit—many tax firms are introducing bundled or packaged services, including tax planning and advice, on a year-round basis. That means instead of paying one price at tax time, you may be paying an annual or monthly fee for regular consultations.
Tax professionals have increasingly embraced this concept because it can help everyone—from taxpayers to tax preparers—be ready at tax time. Having a bigger picture of what a tax return might look like reduces time scrambling for documents and repeated inquiries for forms—it could also mean less likelihood of missed income, deductions, or credits.
Plus, incorporating some proactive tax planning alongside reminders to take required minimum distributions or make estimated payments could save money or avoid an unexpected tax bill.
One of the easiest ways to chase missed income is form matching. In simple terms, the IRS compares what you report on your tax return to what is reported on an information form—like your Form W-2. If those amounts don’t match, and there’s no clear explanation, the IRS will ask for more information or, worse, send you a bill.
That’s one of the reasons the IRS believes that increased information reporting will result in more tax compliance.
And while the Biden administration’s proposal to require banks, credit unions, and other financial institutions to monitor deposits and withdrawals—and subsequently report—accounts that have balances of $600 or more during the year to the IRS is mostly dead, that doesn’t mean that IRS is giving up on reporting requirements.
Notably, beginning on Jan. 1, 2022, third-party payment networks like PayPal and Venmo must report business transactions totaling more than $600 to the IRS on Form 1099-K. Form 1099-K is traditionally used to report certain payments for goods and services paid by credit card or third-party merchants. A reportable payment transaction is a transaction in which a payment card—like a credit card—is accepted as payment or settled through a third-party payment network like PayPal.
As EY’s Debbie Pflieger noted, “This change will substantially increase the number of Forms 1099-K required to be filed with the IRS and furnished to recipients in early 2023.”
These reporting requirements may also mean that taxpayers may need to take steps in 2022 to ensure compliance. Platforms like PayPal and Venmo have made clear that they will require affected users to provide tax information, like a Social Security Number or Tax ID, to continue to accept payments for sales of goods and services during the year.
Expect similar demands for taxpayer information on cryptocurrency platforms. While some platforms, like Coinbase, already provide information about gains and losses to taxpayers, the infrastructure bill mandates some reporting. While the specifics, like the meaning of the word “broker” are still being debated—Treasury guidance is needed—the new law requires certain Form 1099-B and cost-basis reporting for digital assets like cryptocurrency and NFTs.
Just as with Form 1099-K, these reporting requirements won’t necessarily show up on an IRS form in 2022—they kick in beginning in 2024. But with the new law on the books, as well as an international clamor for more cooperation, don’t be surprised to see some platforms and brokers preparing for reporting by requesting verification of identification and tax information in 2022.
More Tax Services Go Digital
We’ve all grown increasingly comfortable with video conferences and calls using services like Zoom and Teams. But are tax services moving in that direction, too? If tax professionals on Twitter are to be believed, the answer is a resounding yes. To read more click here.
Comments powered by CComment