Income Tax Refund Delays Likely

Tax refunds for some taxpayers will be delayed this year due to a provision of the Protecting Americans form Tax Hikes (PATH) Act of 2015. This law stipulates that tax refunds issued to taxpayers who claimed either the Earned Income Tax Credit or the Additional Child Tax Credit must be held until February 15, 2017. Since the same law now requires that employers submit forms W-2 and 1099-MISC to the Social Security Administration by the end of January, pushing the refund issue date out until the middle of February will give the IRS time to match the information submitted on taxpayer returns with the forms submitted by employers.

Prior the initiation of this new time schedule, employers could wait until the end February to report wage information to the government. If filing electronically, they could even wait until the end of March. With many tax refunds issued prior to this, there was no time allotted for the matching of employer and taxpayer information, a situation that is corrected by the new PATH legislation. The law specifically targets the Earned Income Tax Credit and the Additional Child Tax Credit because they are refundable tax credits, meaning that they allow a taxpayer to receive a refund that is greater than the full amount of their tax liability. It is this type of tax break which is most likely to trigger tax fraud and refund error, both of which the new refund issue date is designed to reduce.

The two tax credits affected by the February 15th refund issue date are described below:

·        Earned Income Tax Credit

The Earned Income Tax Credit is a refundable tax credit provided by the IRS for the benefit of low income taxpayers who meet certain specific requirements. Although a small credit is available to childless taxpayers, the main focus of the credit is to provide tax relief for individuals and families with dependent children. Specifically, the 2016 guidelines allow for a tax credit of $506 for tax returns showing no dependent children up to maximum benefit amount of $6,269 for tax returns claiming three or more children. The phase-out thresholds begin at annual income amounts of $8270 for single individuals with no dependents up to $23,740 for married couples filing jointly with three or more dependent children.

·        Additional Child Tax Credit

The Additional Child Tax Credit is a refundable tax credit created by the IRS for the purpose assisting taxpayers who are ineligible to receive the full benefit of the non-refundable Child Tax Credit. Taxpayers who would not receive the full amount of the Child Tax Credit due to the fact that the allowable benefit exceeds the total amount of their tax liability may apply for the Additional Child Tax Credit provided that they have an earned income of at least $3000 for 2016.

Although only returns claiming the either the Earned Income Tax Credit or the Additional Child Tax Credit are affected by the refund delay, data suggests that returns claiming these two tax breaks are more likely to be submitted early. This being the case, the total tax refund dollars issued by the IRS prior to February 15, 2017 is likely to be less than in previous years.

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