DIY Tax Software Costs Family to miss out on $14,000 for College Fund
The Ling family is a married couple who had just had their first child.
Their previous tax professional had just retired, and they were looking for a solution to file their taxes this year.
Initially, they were going to hire an accountant but were not impressed with what they saw on Yelp.
The Yelp results led the husband to use DIY tax software to prepare their taxes.
The married couple’s experience with DIY tax software
The couple was very confident in their DIY tax return, and they checked their calculations themselves and felt they were right.
The husband had to go out of town and would file their taxes when he returned from his business trip.
The wife had second thoughts and did not feel comfortable preparing their tax return for the first time, so she asked for a professional tax referral from one of my clients.
What happened? DIY Tax Software that was supposed to save married couples money left them $3600 short.
After our introductory meeting, I reviewed the married couple’s taxes.
After reviewing their tax information, they did not claim the child tax credit.
The wife did not understand that she and her husband were eligible for the child tax credit.
I walked the wife through the process of claiming her and her husband’s child tax credit.
I was able to fix their error and claimed their $3600 for the child tax credit.
What is the Child Tax Credit
The child tax credit is a tax credit that is available to taxpayers who have qualifying children.
The credit can be up to $3,600 per child, and it may be refundable, which means that you may be able to receive a refund even if you don’t owe any taxes.
To qualify for the child tax credit, you must meet the following requirements per the IRS instructions:
- An individual who does not turn 18 before January 1, 2022, and satisfies the following conditions is a qualifying child for the tax year 2021.
- The person is the taxpayer’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or descendant (for example, a grandchild, niece, or nephew).
- In 2021, the individual did not contribute more than half of their support.
- For more than half of the tax year 2021, the individual lives with the taxpayer.
- The individual is correctly claimed as a dependent of the taxpayer.
- For the tax year 2021, the individual does not file a joint return with their spouse or submit it to claim a refund of withheld income tax or anticipated tax paid.
- The person was either a US citizen, a US national, or a US resident alien.
How did this happen?
The DIY tax software failed to consider the details of claiming newborn children.
This year some people are finding that the software doesn’t consider the tax rules for claiming newborn children.
As a result, these people may pay more in taxes than they should.
DIY tax software can be a great way to save money on taxes, but it’s essential to make sure that the program considers all of the details of your return.
Why did the DIY Tax Software Cost $14,000 for the Child College Fund?
When you do your taxes using DIY Tax Software, you may be costing yourself thousands of dollars in potential credits.
Here is how missing out on the $3600 child credit would have cost this family $14,000 for their newborn college fund.
The following illustration from investortaxhelp.com shows how investing the $3600 into a tax-deferred 529 college savings plan grows into over $14,000 when the child is ready for college.
Conclusion:
In recent years, the use of do-it-yourself (DIY) tax software to prepare federal income tax returns has increased significantly.
While these programs can be helpful, taxpayers should be aware that details of IRS tax rules are not always handled correctly.
In some cases, taxpayers may overpay their taxes or may not receive all of the tax benefits to which they are entitled.
The married couple learned the limits of DIY software and how valuable it is to have someone like a tax professional who knows the tax law details and can be proactive in dealing with tax agencies on their behalf.
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