Child-tax credit No. 1 error in season's federal returns

Refund: Many filers are forgetting to subtract 2003 advance payments and are being disappointed.

April 13, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

As a single mother of five, Sandy Dixon was ecstatic when a tax preparer said her federal refund this spring would be $5,000, thanks to the increase in the child tax credit.

"That's wonderful," said Dixon, a special-education teacher. "It's more than a paycheck." In anticipation of the windfall, Dixon spent half of it on carpeting for her Baltimore home.

Now to the dismay of Dixon - and more than a million other taxpayers - it turns out the calculation was wrong.

That's because last summer, to pump up the economy, the Bush administration gave families an advance on their child credit of up to $400 per child. Dixon received $2,000. When parents file their 2003 returns this year, they are supposed to subtract any advance payments they received.

Many didn't, and the No. 1 error on this season's tax returns involves the child credit, the Internal Revenue Service reports.

As of March 26, about 2.26 million tax returns contained child-credit mistakes. Of those, 1.49 million belonged to parents who failed to subtract the advance refund.

Filers often are learning about their error when they call the IRS to find out what's delaying their refund. The IRS is correcting the mistakes.

The child credit had been up to $600 per child younger than age 17, until last year's tax law raised the maximum credit to $1,000 per child. The credit phases out as income rises. Joint filers with adjusted gross income of up to $110,000 plus singles and heads of household with income of up to $75,000 are eligible for the full credit. Other factors can reduce the size.

Using information from 2002 returns, the U.S. Treasury sent out nearly 25 million advance refunds in July and August, and the government waited for a boost to the economy.

It worked, said David Wyss, chief economist with Standard & Poor's in New York. "If Americans are given money, they will spend it," Wyss said.

The refund checks contributed to a surge in consumer spending and economic growth in the third quarter, he said. The economy grew by 8.2 percent, compared with 3.1 percent the quarter before.

This isn't the first time that government has used such a ploy to jumpstart a sluggish economy. After Congress cut taxes in 2001, taxpayers received a so-called "rebate" that summer - up to $300 for singles and $600 for married couples. And like now, filers the next spring were confused to find that their rebate was part of a refund.

To prevent problems this time, the IRS warned families in a letter weeks before the checks went out that they would have to subtract the money on their returns. Early this year, the agency posted a reminder on its home page online. If filers forget how much they received last summer, the IRS Web site at www.irs.gov can tell them.

"Some people may not understand they are getting the full benefit, they are just getting some of it in advance," said Jim Dupree, an IRS spokesman in Baltimore.

Dixon recalls the $2,000 she received last summer, and she used cash for home repairs and to buy clothes for her children, ages 3 to 13.

"I thought it was a gift the government was giving us," she said. She still will receive $3,000, but it's a disappointment after envisioning how to spend $5,000.

"I feel like the rug has been pulled out from under me," she said. "It was like I was tricked."

Another unhappy filer is Walter Hook of Baltimore County. "Everybody thought it was a gift," Hook said of the check he received last summer.

Four of Hook's seven children qualify for the credit, and he was counting on a bigger refund to pay off bills and get out of debt. His plans are derailed. "Now, I can't get my bills out of the way and fix my house up," he said.

Still, if there's any consolation, filers overall are getting larger refunds than a year ago. As of the first week of April, the average refund was $2,100, up more than 5 percent than for a similar period last year. That's still lower than some forecasts that refunds would be 25 percent higher because of tax cuts.

Economist Wyss remains optimistic. Higher-income taxpayers tend to file close to the deadline, and many will benefit from the new lower tax rates on capital gains and dividend income, as well as the child credit, he said.

Federal tax facts

As of Sunday, 83 million federal returns had been filed, including 1.7 million from Maryland. That's 62 percent of the 132 million expected.

Nationally, 49 million returns had been filed electronically.

In Maryland, 912,000 returns had been filed electronically, 259,000 of them filed using the IRS Free File, available through www.irs.gov.

The average tax refund as of April 4 was $2,100, up from $1,997 for a similar period last year.

Source: Internal Revenue Service

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