Tax Season is getting ready to begin. With some individuals in line to file their taxes with their last paycheck, the IRS will not accept taxes until the end of January. 

Tax liability will be slightly different this year because of the American Rescue Plan (ARP), a financial plan used to stimulate the economy due to the economic impact Covid-19 has had on the United States. Many businesses shut down, furloughed and/or laid off employees, or permanently went out of business leaving the vast majority of those Americans in need of help.

That help came in the form of the ARP. 

Qualifying individuals received a third stimulus check and those with children received monthly checks for their child(ren) and unemployment benefits were extended. What does all of this have to do with taxes? A lot. You are required to report your income including your unemployment. As with any income, taxes are due. For those with unemployment, the first $10,200 of unemployment benefits can not be taxed. This means that if you received $11,500, you owe taxes for $1,300 ($11,500- $10,200 = $1,300). 

If you received the advanced child tax credit this year, that wasn’t free money. 

In fact those funds were part of the credit you will receive in 2022. This means that you may possibly have a greater tax liability. Let’s say that you have three children, two are under the age of six. One child is 10. The IRS advanced you $300 per month per child for all children under six years of age and $250 per month per child for children between the ages of six and seventeen. The child tax credit is $3,600 per child under six $3,000 per child six to seventeen years of age.

Payments for children began in July. So for six months (July to December) you received $1,800 per child under six ($300 x 6). That’s a grand total of $3,600 ($1,800 x 2). For your ten year old, you received $1,500 ($250 x 6). When you file your taxes, you will only receive the remaining amount (which is half of your child tax credit).

Remember you get an annual total of $3,600 per child under six and $3,000 per child six to seventeen. You were advanced $1,800 per child under six and $,1500 for your ten year old. Instead of the aggregate $10,200 you would receive for all three children, you are only entitled to $5,100 ($3,600  + $1,500). 

This may affect your tax liability in that you won’t receive the full tax credit per child. However, with proper tax preparation, your CPA or tax professional can still limit your tax liability with deductions and other credits. 

It would be in your best interest to seek a professional so that your federal taxes are maximized.