Pilla Talks Taxes Featured Article

THE NEW CHILD TAX CREDIT

Welfare Payments Adminsitered by the IRS

One of the biggest problems the IRS faces as the federal government usurps more authority over the lives of the average American is “mission creep.” This is where Congress assigns to the IRS responsibilities beyond the mere task of tax collection.

This has been a major problem since the Obama Administration and the adoption of the Affordable Care Act. In addition, there are as least six “refundable” tax credits in the tax code. A tax credit is a provision that reduces one’s final tax bill, dollar-for-dollar. A tax credit differs from tax deductions and exemptions, which reduce taxable income, rather than your final tax bill directly. Deductions and exemptions reduce one’s tax liability by the amount deducted multiplied by the one’s marginal tax rate.

Refundable credits work to give people more money in refunds than they actually paid in taxes in the first place. The most notable of these credits is the Earned Income Tax Credit. For all practical purposes, refundable credits are welfare programs administered by the IRS through the tax code, and driven by one’s tax return.

Congress has again added to the list of refundable credits with a provision of the American Rescue Plan Act. Under the new law we have a substantially expanded Child Tax Credit. The credit is broken into two elements.

The first provides that households with children under age 6 may claim up to $3,600 per child as a credit. The second element applies for children ages 6 to 17. In that case, the credit is $3,000 per child. The new rules phase out the additional credit amount for single individuals with Adjusted Gross Income under $75,000, $112,500 for head of household, and $150,000 for married filing jointly.

The credit is now fully refundable for 2021 only. Under the current rules, one half of the credit will be mailed to taxpayers in monthly checks beginning in July 2021, continuing through December 2021. The other half will be claimed as a credit against taxes owed on the 2021 tax return (to be filed in April 2022). The Biden Administration is currently pushing to make the refundable aspect of the credit permanent through the American Families Act.

The refundable aspect of the credit promises to load even more duties on the IRS. The IRS must determine the amount to be sent to taxpayers every month. That must be based on one’s income, filing status, and both the number and ages of eligible children to accurately determine the payment to be mailed. The monthly payment system is slated to begin in July. That is probably wishful thinking. Please recall that it took about two years to set up the system of paying advance premium tax credits under Obamacare.

It is quite easy to see how Biden’s plan of loading more refundable tax credits into the law, and making those credits subject to advance payments to citizens, will morph into a system of fixed monthly cash benefits paid by the federal government to tens of millions of American families.

Can you say “Universal Basic Income”?

This is a partial portion of the full April- May 2021 Pilla Palks Taxes electronic newsletter.

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