Form 1040 Tax Credits

January 11, 2023

The Form 1040 is the primary form used by taxpayers to report their annual income and tax liability to the Internal Revenue Service (IRS), and it is important to be aware of the various tax credits that may be available to claim on it. Tax credits are deductions from the amount of taxes owed to the government and can greatly reduce a taxpayers’ overall tax liability.

One of the most well-known tax credits available is the Earned Income Tax Credit (EITC). This credit is designed to help low- and moderate-income taxpayers, and the amount of the credit varies based on the taxpayer’s income level and number of qualifying children. For the 2022 tax year, the maximum credit for those with no children is $543, and for those with one child is $3,618.

Another tax credit available for the 2022 tax year is the Child and Dependent Care Credit. This credit is available to taxpayers who pay for child care or dependent care expenses in order to work or look for work. The credit is based on a percentage of the expenses paid, up to a maximum credit of $3,000 for one child or $6,000 for two or more children.

The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. This credit can be claimed for 100% of the first $2,000 spent and 25% of the next $2,000, with a limit of $2,500 per student.

The Saver’s Credit, also known as the retirement savings contributions credit, is a credit available to low- and moderate-income taxpayers who make contributions to certain types of retirement plans, such as an IRA or 401(k). The credit is based on a percentage of the contributions made, up to a maximum credit of $1,000 for married couples filing jointly and $500 for single filers.

In conclusion, there are several tax credits available to taxpayers that can greatly reduce their overall tax liability. By being aware of these credits and claiming them correctly, taxpayers can reduce the amount of taxes they owe and increase their refund. As always, consult with a tax professional or use tax preparation software to ensure that you are aware of all of the tax credits for which you may be eligible, and to ensure that you are claiming them correctly.

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The IRS this week announced higher federal income tax brackets and standard deductions for 2023 amid skyrocketing inflation. For the tax year 2023, the agency raised the income requirements for each group.

According to inflation adjustments issued by the agency on Tuesday, individual income over $578,125 and married couples’ income over $693,750 would be subject to the 37% top marginal tax rate starting in 2023. These limits will increase 7% from 2022.

The standard deduction will increase by nearly 7% to $27,700 for married couples and $13,850 for single people.

The criteria for married couples in each of the six tax categories below the top 37% bracket are all double then those of individual taxpayers. The rates apply to taxable income, or income that has been reduced by deductions. The 10% tax bracket increases to $11,000 for people in 2023, the 12% bracket increases to $44,725; the 22% bracket increases to $95,375; the 24% bracket increases to $182,100; the 32% bracket increases to $231,250; and the 35% bracket increases to the top-bracket threshold.

The Social Security Administration published the inflation adjustment for the Social Security payroll tax for 2023, which will be levied on incomes up to $160,200 rather than $147,000 for 2022.

When an individual’s income reaches $200,000 and a married couple’s income reaches $400,000, the maximum child tax credit, which is still $2,000, starts to phase down. A maximum of $3,000 may be deducted from ordinary income in the form of capital losses. State and local tax deductions are still only allowed up to $10,000.

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For the final six months of 2022, the Internal Revenue Service announced an increase in the optional standard mileage rate. Optional standard mileage rates can be used to calculate the deductible costs of using a car for business and certain other activities. The normal mileage rate for business travel will be 62.5 cents per mile in the final six months of 2022, up 4 cents from the rate in place at the start of the year. The revised prices will go into effect on July 1, 2022.

The IRS made this special adjustment for the last six months of 2022 in acknowledgment of recent fuel price hikes. The IRS is changing the regular mileage rates to better reflect the recent increase in fuel prices. The IRS is aware that a variety of exceptional issues relating to gasoline costs have come into play, and they are taking this extraordinary action to assist taxpayers, businesses, and others that utilize this rate.

While fuel prices play an important role in mileage calculations, other factors such as depreciation, insurance, and other fixed and variable costs also play a role. Instead of recording actual costs, the optional business standard mileage rate is used to calculate the deductible costs of driving an automobile for business purposes. The federal government and many businesses use this rate as a baseline for calculating mileage reimbursements for their employees.

Rather than using the regular mileage rates, taxpayers can always calculate the actual expenditures of driving their vehicle.

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The tax code has a credit for dependent-care expenses for children under age 13 when the care was provided, and it also can apply to expenses for others of any age who are incapable of caring for themselves—such as an elderly relative. In most years—including 2022—many filers get a credit for 20% of up to $3,000 of eligible expenses for one dependent, or up to $6,000 of expenses for two or more. For very low earners, the credit can be as high as 35% of these expenses. 

Just for 2021, however, Congress greatly expanded the Child and Dependent Care credit substantially  making it more generous and potentially refundable, up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons. This means an eligible taxpayer can receive this credit even if they owe no federal income tax. Your federal income tax may be reduced by claiming the Credit for Child and Dependent Care expenses on your tax return.

A qualifying person generally is a dependent under the age of 13, a spouse or dependent of any age who is incapable of self-care and who lives with you for more than half of the year.

You may be eligible to claim the child and dependent care credit if you paid expenses for the care of a qualifying individual to enable you and your spouse, if filing a joint return to work or actively look for work and you or your spouse if filing a joint return lived in the United States for more than half of the year. However, special rules apply to military personnel stationed outside of the United States.

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The IRS announced this month that most Americans should receive their refunds within 21 days of filing – with some exceptions. Due to regulations designed to prevent fraud, claiming the Earned Income Tax Credit will slow down your tax return. As a result, people who claim this credit and file their returns on January 24 or close to that date may not receive their refund until early March, according to the IRS.

The reason for this is due to The Protecting Americans from Tax Hikes Act of 2015 that slows refunds for persons who claim these benefits. The regulation was enacted to target fraudsters who use identity theft to steal taxpayer refunds.

Although the IRS claims that most refunds would be issued within 21 days, experts caution that delays are inevitable due to the agency’s ongoing work on 2020 tax returns.

Despite the fact that some people prefer to file paper returns and others have no choice, the IRS claims that taxpayers who file electronically are more likely to have their returns processed fast. Last year, approximately 10 million persons filed paper forms, accounting for about 7% of the 148 million returns filed in 2021. Experts advise people to join the 138 million taxpayers who already use electronic filing.

The IRS also advises taxpayers to set up direct deposit for their refunds. The quickest way to obtain your money, according to the agency, is to employ a combination of e-filing and direct deposit, which transfers the money directly to your bank account. Last year, around 95 million customers received refunds, with approximately 87 million opting for direct deposit. According to the IRS, most taxpayers who file electronically and choose direct deposit will get their refund within 21 days, assuming there are no issues with the return.

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As of late, the IRS has been sending out letters with valuable information for Advance Child Tax Credit and for the third round of the Economic Impact payments to those who qualify.  Letters will be going out until the end of January. Keeping this information and using it to prepare your tax return will help to reduce errors and delays in processing.

For those who will be receiving these letters, the IRS urges you to hold on to these letters to help you prepare your 2021 federal tax returns.

The following information will help taxpayers coordinate and receive the Child Tax Credits, they are entitled to.  As of late December through January, the Internal Revenue Service will send out the 6419 Letter for the advanced CTC. This letter covers the amount of advance Child Tax Credit payments made in 2021 and the amount of qualifying children used to calculate their advance payments. Taxpayers should keep this letter as well as all letters from the IRS along with their tax records regarding advance Child Tax Credit payments.

Taxpayers who have received advance payments will have to file a 2021 tax return and check the Child Tax Credit payment they were given in 2021 along with the credit they were allowed on their 2021 tax return 

If taxpayers did not get advance Child Tax Credit, they may claim the full amount of the Child Tax Credit on  2021 tax return filed in 2022. This includes families who normally do not file tax returns.

Toward the end of January, the Internal Revenue Service will be sending out the 6475 Letter for the third Economic Impact Payment to EIP  beneficiaries. The letter will help recipients decide if they are entitled to and should claim the Recovery Rebate Credit on their 2021 tax return which they will file in 2022.

For the 3rd round of Economic Impact Payments issued in March of 2021, the 6475 Letter has been sent out. The third round of Economic Impact Payments included the “plus-up” payments, which were advance payments of the 2021 Recovery Rebate Credit that would be claimed on the 2021 tax return.

The IRS sent out the plus-up payments to beneficiaries who were given the third Economic Impact Payment. This payment is provided from information provided by VA, SSA, and RRB. This also applies to people who might be eligible for a larger amount based on their 2020 tax return. The plus-up payments were additional payments the IRS sent to those who received a third Economic Impact Payment based on their 2019 tax return.

Most people who are eligible, have already received their payments. Those who are missing stimulus payments should review the information to find out their eligibility and if they need to claim a Recovery Rebate Credit for the tax year 2021.

The Economic Impact Payment letters are like the advance CTC letter. It includes important information that will help taxpayers accurately and quickly file their tax returns.

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Lower-income taxpayers are getting some very good deals. If your modified adjusted gross income (AGI) does not exceed $40,000 for singles, $50,000 for the head of the household, or $60,000 for couples filing jointly, and you have been a resident in the U.S for over half of 2021, you will not have to return any overpayment amount.

That said, if you are a parent with a higher income, quite the opposite will happen.  If your modified adjusted gross income (AGI)  is $80,000 for single filers, $100,000 for the head of the household filers, or $120,000 for a couple filing jointly, you will have to pay back the entire overpayment!

This is also very confusing for those taxpayers who are stuck in the middle.  A portion or part of your over-payment might be overlooked if your modified AGI for 2021 is between $40,000 and $80,000 as single filers, $50,000 and $100,000 as head of the household, or $60,000 and $120,000 as a couple filing jointly. To find out where you stand as far as the payment being wiped out, you will have to calculate what the IRS refers to as your “repayment protection amount”. It’s equal to $2,000 multiplied by:

How many children the IRS used to calculate your monthly child tax credit payment, minus the number of children used to calculate your total credit amount on your 2021 tax return.

If there is no difference between the number of children applied to calculate the 2 amounts then there is no overpayment reduction and the full amount will have to be repaid.  If you have a positive repayment protection amount, it will slowly phase out as your modified AGI increases within the above-mentioned ranges. 

The rate is based on how much your modified AGI exceeds the lower limit of the income range. Since your final repayment protection amount is calculated, it will be subtracted from your overpayment so you will know how much you will have to repay. Keep in mind, your overpayment cannot be reduced below zero.

This, again, can be confusing. As an example, if Mr. X is single and has claimed a child tax credit for 2 children on his 2020 tax return and they are between 2 and 4 at the end of 2021, the IRS will send him $3,600 in monthly payments in 2021. However, he cannot claim the child tax credit on his 2021 return if his ex-wife is claiming the 2 children as dependents on her return.  His 2021 child tax credit is $0 so the entire $3,600 he received from IRS is considered an overpayment. His initial repayment protection is $4,000 for each child at $2,000. Therefore, if Mr. X filed his 2021 return with a modified AGI of $60,000, his modified AGI exceeded the lower limit of the appropriate income range; $40,000 by 50% – $60,000 – $40,000 / $80,000 – $40,000 = 0.5. As a result, his $4,000 repayment protection amount will be reduced by 50% to $2,000 and he only has to repay $1,600 of the $3,600 over-payment ($3,600 minus $2,000 equaling $1,600.

 

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If you need help paying health insurance premiums during the year, you can apply to receive the Advance Premium Tax Credit.

You can claim the Advance Premium Tax Credit when you buy insurance coverage through a Health Insurance Marketplace and reconcile it on Form 1040 with Form 8962.

The credit is based on your estimated income for the year, so you can claim it before you actually file your taxes. The Advance Premium Tax Credit is paid directly to the insurance company every month to lower your premium payment amount.

If you received too much Advance Premium Tax Credit in 2020, you won’t have to pay back the excess—and if you’ve already filed your 2020 return and paid back the excess on Line 29 of Form 8962, Premium Tax Credit, you should not file an amended tax return only to get a refund of this amount. The IRS will determine the correct amount and refund it to you. 

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Need more time to prepare your federal tax return?
Please be aware that:
  • An extension of time to file your return does not grant you any extension of time to pay your taxes.
  • You should estimate and pay any owed taxes by your regular deadline to help avoid possible penalties.
  • You must file your extension request no later than the regular due date of your return.
  • Filing this form gives you until Oct. 15 to file a return.
  • To get the extension, you must estimate your tax liability on this form and should also pay any amount due.

Get an extension when you make a payment

You can also get an extension by paying all or part of your estimated income tax due and indicate that the payment is for an extension using Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or a credit or debit card. This way you won’t have to file a separate extension form 4868 and you will receive a confirmation number for your records.
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Reasons for Refund Delays

February 5, 2020

Some tax refunds take longer than expected. The IRS may delay refunds for several reasons, including the following:

• Errors in Direct Deposit information (refunds then sent by check);

• Financial institution refusals of Direct Deposits (refunds then sent by check) or delays in crediting the Direct Deposit to the taxpayer’s account;

• Claims of the Earned Income Tax Credit or Additional Child Tax Credit require the IRS to hold the entire refund until mid-February

• Estimated tax payments differ from amount reported on tax return (for example, fourth quarter payments not yet on file when return data is transmitted);

• Bankruptcy;

• Inappropriate claims for the Earned Income Tax Credit, Additional Child Tax Credit, Credit for Other Dependents’ Child Tax Credit, or American Opportunity Tax Credit; or

• Recertifications to claim the Earned Income Tax Credit, Child Tax Credit, Additional Child Tax Credit, Credit for Other Dependents’ or American Opportunity Tax Credit.

The IRS sends a letter or notice explaining the issue(s) and how to resolve the issue(s) to the taxpayer when it delays a refund. The letter or notice contains the contact telephone number and address for the taxpayer to use for further assistance.

The IRS offsets as much of a refund as is needed to pay overdue taxes owed by taxpayers and notifies them when this occurs. The Bureau of the Fiscal Service offsets taxpayers’ refunds through the Treasury Offset Program (TOP) to pay off past-due child support, federal agency non-tax debts such as student loans and unemployment compensation debts, and state income tax obligations. Offsets to non-tax debts occur after the IRS has certified the refunds to Fiscal Service for payment but before Fiscal Service makes the Direct Deposits or issues the paper checks. Refund offsets reduce the amount of the expected Direct Deposit or paper check but they do not delay the issuance of the remaining refund (if any) after offset. If taxpayers owe non-tax debts they may contact the agency they owe, prior to filing their returns, to determine if the agency submitted their debts for refund offset. Fiscal Service sends taxpayers offset notices if it applies any part of their refund to non-tax debts. Taxpayers should contact the agencies identified in the Fiscal Service offset notice when offsets occur if they dispute the non-tax debts or have questions about the offsets. If taxpayers need further clarification, they may call the Treasury Offset Program Call Center at (800) 304-3107. If a refund is in a joint name but only one spouse owed the debt, the “injured spouse” should file Form 8379, Injured Spouse Allocation.

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