Written by: Elissa Wurf, PhD, CFP®, CPA
In our effort to keep clients apprised of tax news, we wanted to let you know that you may soon receive (or you may have already received) one or both of the following tax letters from the IRS. Please set these aside with your other important tax documents.
Letter 6419, 2021 Advance Child Tax Credit Letter (only sent to those with children)
This tax letter delineates the total advance child tax credits you may have received in 2021, as well as the number of qualifying children on which the payments were based.
Your tax preparer will compare the amount of advance payments received with the amount that you are entitled to receive based on your 2021 income and will reconcile these payments. Historically, these payments have been credited on the final tax return. If you received less than you were entitled to, you will receive a credit which will reduce your tax owed or increase your refund. But if you received more than you were entitled to, this may result in an increase in your tax balance due or a reduction in your refund.
After December 31, 2021, taxpayers will no longer receive monthly Advance Child Tax Credit payments. If the Build Back Better Act passes as it is currently drafted, the payments would resume.
Letter 6475, Your Third Economic Impact Payment
This letter refers to the third round of “stimulus” payments that were issued starting in March 2021. The third stimulus payment had much narrower eligibility than the first two stimulus payments made in 2020 and you might not have qualified to receive one. The income limits for qualifying for the 2021 stimulus payment are $80,000 for an individual and $160,000 for a married couple. Most eligible people have already received the payments, but if you did not receive a payment you were entitled to, you will be able to claim a “Recovery Rebate Credit” on your 2021 tax return. You may also have received a document from the IRS titled “Notice 1444-C, Your 2021 Economic Impact Payment” with this same information. Since Letter 6475 is based on guidance issued in November of 2021 while the Notice 1444-C is based on guidance issued in April of 2021, the information in Letter 6475 will be more up-to-date. If you made more than the qualifying income amounts, you may be expected to return some or all of the economic impact payment when you file your tax return.
Estimated Taxes for Fourth Quarter 2021 are due on Tuesday, January 18, 2022
If your tax payments (withholding on your wages, pension, IRA distribution, Social Security, or previous estimated payments) are not above one of the safe harbors, you should make a fourth quarter 2021 estimated payment – which is due on January 18th, 2022.
There are two safe harbors, and your Financial Strategist may have previously told you whether you were above one, in which case, there should be no need for further action.
The “Prior Year Safe Harbor” depends on your 2020 Adjusted Gross Income, found on line 11 of your 2020 1040 tax return. This number is an exact number, because it is based on your actual prior year tax return. This is the number we, at Agili, prefer to use if your income is the same or more than it was in 2020.
- If this number is less than $150,000, then your Prior Year Safe Harbor is 100% of your 2020 federal total tax found on line 24 of the tax return.
- If this number is $150,000 or above, the Prior Year Safe Harbor is 110% of the prior year tax found on line 24.
The “Current Year Safe Harbor” is only an estimate, so it is the less-preferred method, but if your income in 2021 is less than it was in 2020, it often makes more sense to use this figure. It is based on 90% of your current year tax.
If your Financial Planning Analyst has previously done a tax projection for you, and you are uncertain about what your Current Year Safe Harbor is estimated to be, your FPA can run an update if requested within the next week (to allow time to run the estimates before the January 18, 2022 deadline).
For more information about the tax letters you may have received – or may receive in the future, please review this information from the IRS.
Check out Elissa’s December 2021 blog post, Tax Planning vs. Tax Preparation.