Mid-year tax updates
/Advance Child Tax Credits (ACTC)
The IRS has started issuing advances of the 2021 child tax credit.
They have created an online portal system for you to manage your payments. You can update your bank account information as well as the dependents you’re claiming. This is most important if you switch off claiming a dependent with an ex-spouse.
IF YOU RECEIVE MORE OF THE ACTC THAN YOU WERE ELIGBLE FOR, YOU WILL HAVE TO PAY IT BACK. Because of this, we recommend most of our clients opt out of receiving the credit early. Instead, it will provide a larger refund or reduce your taxes owed when we file your 2021 tax return. Everyone’s situation will be different. Please consult your tax preparer.
Here is a link to the portal system within the IRS’s website. https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
California taxation of the Paycheck Protection Loan
During tax season, California had not decided how it was going to treat the PPP loans many businesses received during 2020. We now have their guidance.
For California purposes, forgiven PPP loans are excluded from taxable income
HOWEVER: You have to qualify to deduct the expenses paid for with the forgiven PPP loan. To qualify, you must meet the following requirements:
Your business cannot be publicly traded
Your 2020 annual gross receipts must be at least 25% lower than your 2019 gross receipts
If you do not meet the gross receipt reduction test, you will need to amend your California tax return to reduce your expenses by the amount of forgiven PPP loan. It doesn’t matter if your loan was forgiven in 2021. California wants the adjustment on the 2020 tax return.
It is your responsibility to review your gross receipts and contact our office if you need to file a corrected tax return.
Delayed refunds and payment posting
Many clients are experiencing serious delays in receiving their 2020 tax refunds, especially if the refund contained missing stimulus money or Form 7202 tax credit. Unfortunately there is not much that can be done. We recommend you routinely check https://www.irs.gov/refunds for updates.
Also look out for any correspondences from the IRS via mail. They could mail you a letter asking you to call and verify your tax information. This is something you need to take care of in a timely manner.
Additionally, it’s important to check your bank account to make sure your 2020 taxes have cleared as well as your 2021 estimated tax payments. We highly recommend you make your payments online instead of mailing in checks. All tax payments need to be made under the primary taxpayer’s social security number. This will be the name that appears on the top line of Form 1040.
IRS is sending out notices of balance due or reduced refunds because of stimulus money (EIP)
Key points to first understand:
The stimulus is referred to as “Economic Impact Payment” or EIP by the IRS.
Even though you received the 2nd EIP in 2021, we had to reconcile it on your 2020 tax return.
When we filed your tax return, we asked a few questions about your 1st and 2nd round EIP. These questions were to ensure we correctly reported the amount you received.
The EIP money was not taxable. If you did not receive the full EIP you were entitled to, the remaining was claimed as a credit on your tax return. This credit was called the “Recovery Rebate Credit” and appears on Line 30 of your 1040.
The 2nd EIP could have been issued on a debit card. It’s not clear why some people got it by direct deposit, check or the pre-paid debit card. The pre-paid debit cards are causing problems because people discarded them thinking it was junk mail.
Now the IRS is matching up tax returns with their records of EIP disbursements. If you received more EIP than you indicated when we filed your tax return, you will likely be getting a notice from the IRS stating you owe money or they’ve adjusted your refund.
Here’s an example:
When we prepared your tax return, you stated you didn’t receive the 2nd EIP for $600. Therefore we file your tax return claiming a $600 Recovery Rebate Credit. You were owing $1,000, but the credit reduced your balance to $400. The IRS checks their records and shows an EIP for $600 was issued to you. Now, you have received a notice showing a balance due of $600 plus penalties and interest.
The IRS is NOT verifying that you cashed the check or that your pre-paid debit card was activated. They are simply verifying if you were entitled and that an EIP was sent.
Unfortunately, the burden for confirming you received the money or requesting a new pre-paid card will be on you.
The best thing to do is pay the balance shown on the notice as soon as possible. Then visit the IRS FAQ to see which circumstance you fall into to determine your course of action to receive the missing stimulus money.
The most common issue seems to be the loss of the debit card (EIP card). Follow the instructions in the FAQs to request your replacement if this is your issue.
California to issue additional stimulus money
California is going to issue stimulus (Golden State Stimulus II) to families and individuals who qualify. You may receive this payment if you make $75,000 or less and file your 2020 tax return. Payments are anticipated to begin in September 2021. Please note, if you received the first Golden State Stimulus and do not have dependents, you do not qualify for the Golden State Stimulus II.