Child Tax Credit Limbo Leaves Families With Tough Filing Choices

Millions of families are getting conflicting advice about whether they should file taxes now or wait until closer to the April 15 deadline to see if Congress enacts a bipartisan tax bill that would expand the child tax credit.

IRS Commissioner Danny Werfel said taxpayers shouldn’t wait for Congress to act on expanding the child tax credit and file. If the law passes—not likely any time soon considering pushback from some senators—the IRS will make sure taxpayers still get what they are owed, without having to file amended returns.

The reality for many taxpayers is that they rely on the refund and can’t afford to wait to file. Tax prep software companies H&R Block Inc. and Intuit Inc. echoed Werfel’s sentiment—file as soon as you are ready—while some tax professionals are encouraging taxpayers to wait if they can, as the IRS will give more guidance and estimates on timing of refunds if the bill passes.

“It’s a mess,” said Ryan Ellis, an enrolled agent and president of the right-leaning Center for a Free Economy.

Changes on the Fly

The bipartisan tax bill pairing business breaks with the child tax credit passed the House last week and moves to the Senate where it faces an uphill battle of GOP objections. It’s unclear when the Senate will vote on the bill.

The proposed law would allow low- and moderate income taxpayers—even if they don’t owe income taxes—to be eligible for up to $1,800 per child in the first year instead of current $1,600 cap. That refundability increases in subsequent years. Low-income parents with multiple kids would have a large benefit, according to the Center for Budget and Policy Priorities.

Higher-income taxpayers are generally not impacted by the bill’s changes this year. Some low-income taxpayers may want a refund fast and won’t wait to file—no matter what the tax professionals suggest, Ellis said.

“People that are wanting to file their returns as soon as possible, I will honestly tell you I am not a fan of that,” said Tom O’Saben, director of tax content and government relations at National Association of Tax Professionals. “There is always an opportunity for late receipt of documents, amended documents, corrected documents, something missing, a change from Congress.”

Tax preparation software companies H&R Block Inc. and Intuit Inc. are endorsing Werfel’s recommendation to file as soon as possible.

There are benefits to filing early, said Andy Phillips, director of agency and industry relations at H&R Block. A Social Security number can only be associated with one tax return that’s electronically filed and so if a fraudster files first, a taxpayer would be rejected and it could take months longer to get a refund, Phillips said.

“That’s a huge headache and can cause meaningful economic hardship for certain taxpayers,” Phillips said.

Victims of tax identity theft are waiting roughly 19 months for the IRS to process returns and send refunds, National Taxpayer Advocate Erin Collins said in her report to Congress in January.

The average tax refund for all taxpayers is about $3,000, 2022 IRS filing season data shows. Other child-related tax credits should also drive taxpayers to file as soon as they can, said Lisa Greene-Lewis, a spokesperson for Intuit and a certified public accountant.

H&R Block and Intuit are working now to make sure their software is ready if the legislation passes.

“It’s a lot of human changes,” Phillips said. “Because we’ve done all the legwork now to know what we need to do, it’s a matter of pulling the trigger. We will be ready to serve taxpayers very quickly.”

Adam Markowitz, owner of Luminary Tax Advisors, said he is more skeptical about how fast the bigger refunds will get in the hands of taxpayers. He recommends taxpayers wait it out.

“The deeper we go into the season, the harder this gets for the IRS to make changes on the fly,” Markowitz said.

IRS Guidance

The IRS hasn’t provided more guidance on how it would implement the proposed changes from the tax bill. Congressional tax writers have said the IRS assured them it would take six weeks to process changes to the tax credit.

The agency has been mum on how long it would take to issue the reflecting refunds. An IRS spokesperson said the agency doesn’t comment on pending legislation.

Depending on the guidance the IRS issues if the law passes, taxpayer’s don’t want to be in a position where they wish they had waited, Ellis said, adding that he expects for those who waited for the law to pass may find they’re behind others who waited, too.

The IRS isn’t a stranger to mid-filing season legislation and now, with the tens of billions of funding from the 2022 tax-and-climate law, it is arguably more prepared to react.

After the enactment of the American Rescue Plan Act in 2021—which included retroactive tax benefits after many taxpayers already filed their returns—the IRS automatically made the adjustments and issued additional payments.

Taxpayers should “file as soon as they’re ready and get the refund to which they’re entitled,” Phillips said.

The IRS will have to do a PR push to let taxpayers know they don’t need to do anything if they already filed their returns to avoid more taxpayers filing amended returns to the agency.

“The last thing you want to do is confuse the IRS,” Ellis said.