Child tax credit causes 1.35 million return goofs
By Kay Bell • Bankrate.com

Did your tax refund check show up a bit short? Then you're probably among the 1.35 million taxpayers who had problems claiming the child tax credit.

So far this tax season, confusion on how to claim the increased tax credit leads the list of filing mistakes. The reason: Millions of taxpayers got an advance payment of this tax break last summer after the credit was increased from $600 to $1,000 per child.

Rather than make parents wait until they filed their returns this year to get the added tax break, lawmakers ordered the Internal Revenue Service to mail out the extra $400 early. Around 24 million taxpayers got the money last summer.

Those unexpected checks were welcome back then. Now, they are causing tax headaches. Because the checks were an advance against 2003 taxes, taxpayers must take the amount into account when doing final filing paperwork. But the Internal Revenue Service reports that through March 5, more than 900,000 filers forgot to do the extra math. Another 450,000 figured it wrong.

The situation is similar to the tax-filing problems encountered three years ago when the income tax rates were lowered. Filers then also got early IRS checks. And the next filing season, they, too, had trouble figuring out just how the payments applied to their 1040 filings.

"There are still some errors being made, but it's not as bad as last time," says Cindy Hockenberry, information coordinator for the National Association of Tax Professionals. "But there are still a fair number of people forgetting to report it, reporting the incorrect amount or who don't know what amount to report."

Extra tax paperwork
Contributing to this tax season's child tax credit problem, notes the IRS, is that some taxpayers did not hang onto the statement that came just before they got last summer's check.

That document, IRS Notice 1319, detailed the taxpayer's advance credit amount and how that figure was reached. The notice, or the amount listed on it, is critical in determining just how much more credit a filer can claim this filing season.

Take, for example, Jim and Jane Smith, who got an advance tax credit of $400 last summer because they have one eligible child. When the Smiths filed their 2003 return, they should have subtracted that $400 from the maximum credit amount of $1,000. That would give them a $600 credit against their overall tax bill.

The Smiths, however, forgot about the advance payment when they filled out their 1040. They simply entered the full $1,000 child tax credit amount on their Form 1040 and used the larger, incorrect credit amount to help get a bigger refund check.

But IRS employees did catch the mistake. In fact, the agency is automatically checking all child tax credit claims against records of advance payments to confirm that taxpayers factor in last summer's checks. When it finds mistakes, the IRS corrects the errors and refigures tax bills due or refund amounts. And, to the added annoyance of the Smiths and fellow mistaken filers, the process means that not only will refund checks be smaller, it will take longer for taxpayers to get them.

Figuring your accurate credit
To save yourself (and the IRS) time and frustration, dig out your Notice 1319 before you start work on your return. If you can't find it, you can get your accurate advance tax credit amount from a special IRS Web page or by calling the agency's toll-free help line at 1-800-829-1040.

Whether you call or go online, you'll need your Social Security Number, your filing status and the total number of exemptions you claimed on your 2002 return. (The IRS used that earlier filing information to figure the advance 2003 check amounts.) From this data, the IRS will be able to provide you with the correct advance credit amount.

Then enter that amount on line 2 of the child tax credit worksheet, found in the instructions for Forms 1040 and 1040A. The worksheet will help you determine the credit amount to claim on your tax return.

Other credit considerations, good and bad
In this process, there also is a chance for a bit more confusion where taxpayers did not receive the full advance credit for which they were eligible. This is the case where other debts were subtracted from the advance payment.

"A person may have been eligible for the full $400 advance credit payment," notes NATP's Hockenberry, "but only got a $200 check because of government offsets that were collected. For example, a filer who owed back child support payments would have that past-due amount taken out of the advance credit check.

"Even if the government kept some of the credit," says Hockenberry, "the taxpayer still has to report the full credit."

Why? Because, says the IRS, the taxpayer still got a benefit from the offset -- having a debt paid -- even if it wasn't in the form of a check made out to the individual.

And some taxpayers might actually get an extra, and technically undeserved, tax break.

What if you got the advance payment last year, but discovered in filling out your 2003 return that you're not eligible for the credit? Some taxpayers might find themselves in this position because the checks were based on 2002 filing circumstances that changed the following year.

Good news: You don't have to give the money back, so don't enter the amount of your windfall on your return.