Big glitch in 2021 HR B software until it updates, check others

[I am He]

I always grab a copy in Nov to run my numbers to see the "window" we have for Roth conversions. I think this one just cost me $2,000 (thankfully not $3,000) since they don't have an update scheduled until after the new year.

The main issue is we have a child and qualify for the Child credit. The boys in Washington changed the credit this year to be refundable instead of non-refundable. (I recently got into the weeds since Manchin has argued against the BBB partially due to this increased credit from $2,000-$3,000 (or even $3,600 for youngest kids). Furthermore, I was about to increase the conversion so the $3,000 credit could be applied before realizing that for 2022 it was a refundable credit).

In years past, I'd change our tentative Roth conversion to maximize the $2,000 credit. It was either use it or lose it. Convert too little and the credit wouldn't offset the taxes due up to the $2,000 figure. Convert too much and the credit hits the ceiling of $2,000 and you owe what's due over it.

This year I ran the numbers and did the same and the results were the same as in years past. I estimated low and high conversions and used the software to hit that ceiling of $2,000 to determine how much to convert. Then I made our Roth conversion a couple of days ago after hearing some brokerages were swamped with conversions beyond normal flow (everyone was worried the back door Roth was about to disappear) and wanted to get ours in on time. Done, or so I thought.

Then after reading about the child credit and that it was going to be refundable in 2021, I realized the mistakes in the software.
1. It still only had $2,000 instead of the $3,000 credit.
2. It calculated it as a nonrefundable credit (or else it would have given me a refund when under converting).
3. Not related, but the $600/couple charitable line item was still saying $300 as in years past.

Since Roth conversions can't be undone, we're stuck paying tax of $2,000 on this year's conversion. At 12%, this is tax on about $16,666 of conversions.

Normally, we would have been concerned about the ACA cliff. This year I wanted to go above and my zeal to optimize, combined with this faulty software, we're going to get bit.

I'm sure they'll catch it on other updates, but for now, I'm a bit PO'd. Please check your software such as Turbo and whatnot.

 

[OverThinkMuch]

HR Block made another mistake 2 years running. If you enter a phone number, that number is cleared when you enter a foreign address. But it insists the phone number, which HR Block cleared, is required. And it won't let you edit it. You cannot file until they fix their bug.

Screwing that up one year would be a problem - but they screwed this up both years I bought HR Block. That to me shows poor quality control, and I switched to a competitor this year.

 

[cathy63]

The Child and Dependent Care Credit was also expanded and made refundable for 2021, so if you have childcare expenses make sure the software is reflecting the new numbers. That may help offset some of the tax you owe.

 

[Gumby]

Wouldn't hurt to shoot them an email to mention the problems. I've done it in the past. You can also call, which I have also done.

 

[I am He]

How did you get a copy of the 2022 tax program? Sounds like you've been had as the 2021 program is only out in very early versions. Possibly referring to the 2021 program?

T/Y...I changed the title.

 

[SecondCor521]

I do agree that tax software usually has bugs early on, and I agree that Roth conversions can't be recharacterized these days.

But I don't understand the OP, specifically "Since Roth conversions can't be undone, we're stuck paying tax of $2,000 on this year's conversion."

If the tax software is inaccurately reflecting a lower CTC and the CARES credits than what the law actually says, and you used that tax software to target a Roth conversion amount to get a zero tax liability which you then (I assume properly) executed, then:

1. You're not forced to pay any taxes currently. The IRS isn't even accepting tax returns yet, and your tax software should be corrected by then. When the tax software is corrected, you should be getting, if anything, a refund (assuming I'm understanding what you're saying and you entered everything accurately in your pro forma return).

2. You didn't convert too much to Roth. If you put in your data properly and did a Roth conversion to get to zero liability based on tax software that currently had the credits too low, then when those credits are increased in the tax software, at worst you'll lose some nonrefundable portion of credits; at best you'll get a refund. If anything, you might have under-converted thus far, because you may be currently wasting those higher tax credits that should eventually show up in the corrected software.

Overall, it seems to me that OP has the logic backwards - targeting a Roth conversion based on software that has the credits too low doesn't generally mean that they'll owe additional taxes, it means they'll generally owe less taxes.

Unless I am missing something and should go drink more coffee. That's happened before.

 

[I am He]

But I don't understand the OP, specifically "Since Roth conversions can't be undone, we're stuck paying tax of $2,000 on this year's conversion."

If we converted $16,666 less. We'd be getting a $2,000 refundable credit. As was done based on their notion of a non refundable credit, we are "paying" $2,000 (in the form of a tax credit) on that amount of conversion.

So it's "costing" us money.

In years past, the credit was non refundable so not taking advantage of racking up a $2,000 tax bill left money on the table.

 

[SecondCor521]

If we converted $16,666 less. We'd be getting a $2,000 refundable credit. As was done based on their notion of a non refundable credit, we are "paying" $2,000 (in the form of a tax credit) on that amount of conversion.

So it's "costing" us money.

In years past, the credit was non refundable so not taking advantage of racking up a $2,000 tax bill left money on the table.

Refundable credits are paid out regardless of tax liability, so your use of that term is confusing to me in this context.

But there are AGI limitations that apply to the CTC stuff, so maybe that's what you are seeing: With the CTC, there are relatively high income levels that disqualify people from the (temporarily increased for 2021) amount of the credit, so if you were MFJ and had an AGI of over $150K, that would reduce your credit. But you still should be entitled to at least $2K per child unless your AGI is above $400K MFJ.

Maybe some clarifying questions would help, if you're interested in me trying to help clarify the situation (and I respect you not being interested in my help ;-) if you so decide):

1. Are you filing MFJ for 2021?
2. Did you live in the US for more than half of 2021?
3. What is your 2021 AGI as things stand today? (Rough approximation is probably OK. Actually, just $0 - $150K, $150K - $400K, or over $400K is all that is needed to figure things out if you are MFJ.)
4. How old will your child/children be at the end of 2021?

This whole CTC/ACTC/RCTC stuff is much more complicated this year than in past years. That makes it hard to figure out what's going on.

 

[I am He]

I appreciate the help, but it's basically a done deal since we did the conversion on Monday.

We owe $2k tax on an AGI of about 88k including a 52k conversion which will be a covered due to the child tax credit.

However if the software was up to freaking date, and had we converted only 35k, we'd owe zero tax. And due to the (refundable for 2021) CTC, we'd be getting a refund of $2k.

**Both computations are technically incorrect as the CTC for us will be $3k. In the way we've got it done, $1k will be refunded and $2k will cover the conversion tax. In the hypothetical one, we'd have been refunded $3k. **

Hence, the tax on a portion of the conversion ($16,666) is preventing $2,000 from being deposited to my account.

 

[SecondCor521]

I understand the Roth conversion is a done deal.

It's still possible that you're misunderstanding your own taxes (it seems to me you are), which might be helpful to straighten out. An accurate understanding may not change your tax picture or decisions this year, but it may help in future years.

Also, it's still possible that you might want to do an additional Roth conversion, which you still have until 12/31 to do.

If you're MFJ, lived in the US for more than half this year, had an AGI of $88K including the conversion, and have one child over 6 but under 18 as of the end of 2021, then regardless of the software or your tax liability, you should have a refundable CTC of $3K.

What seems to me to be happening is that you're blaming the broken tax software or the CTC somehow for your mistake in overconverting.

But the $3K refundable CTC should be the same for you in all situations - whether you converted $0, $35K, or $52K - so that shouldn't be a factor in the difference. Because in all three scenarios, your AGI remains under $150K (and of course your residence, filing status, and child's age are constant).

And the broken software, because it was *undercalculating* the benefit to you of the CTC (and the CARES $300/$600 adjustment), should have led to you *underconverting* to Roth. That would not explain you *overconverting* your Roth.

Sure, you're paying $2K more in taxes because you did $16.6K more in conversions - but that's just the income tax you're paying on taxable income. It's not a loss of the RCTC and not a consequence of broken tax software.

 

[jebmke]

I always take tax software with a grain of salt until they release updates in January; most tax software doesn't really stabilize until March even in normal years.

 

[Philliefan33]

It may not be only HRB software that is incorrect, and it may not be their fault. The Tax Slayer software we use for AARP TaxAide is using TY2020 forms to report the CTC, so treating the credit as non refundable. TS is blaming the IRS for not yet releasing the new forms (there are other forms not even included in the software).

 

[RE2Boys]

It may not be only HRB software that is incorrect, and it may not be their fault. The Tax Slayer software we use for AARP TaxAide is using TY2020 forms to report the CTC, so treating the credit as non refundable. TS is blaming the IRS for not yet releasing the new forms (there are other forms not even included in the software).

Good to know, I'm just starting to get familiar with 2021Tax Slayer for the VITA program

 

[Philliefan33]

Good to know, I'm just starting to get familiar with 2021Tax Slayer for the VITA program

Warning: if you take the “advanced” test in Pub 6744, answer question #35 in a way that shows you know that the CTC is refundable for TY2021. The software will lead you in the wrong direction.

 

[SecondCor521]

Warning: if you take the “advanced” test in Pub 6744, answer question #35 in a way that shows you know that the CTC is refundable for TY2021. The software will lead you in the wrong direction.

CTC is only refundable in 2021 if the TP or spouse meets the principal place of abode test. But in the case you're referring to I think it is, and it typically will be.

 

[Philliefan33]

CTC is only refundable in 2021 if the TP or spouse meets the principal place of abode test. But in the case you're referring to I think it is, and it typically will be.

I can confirm that the answer is supposed to reflect that CTC is refundable, as I already took the test/have seen the answers. (I’m an instructor and we had to certify by mid December)

 

[Sunset]

Seems to me OP is complaining that using unfinished software lead to the wrong conclusion.
That is the risk of early tax planning/actions.

OP is really complaining about "paying" tax by not getting a larger refund on Roth Conversions that OP probably should be doing anyway.

Finally OP has not lost anything, if the CTC were non-refundable like last year, OP would have done what was done and not gotten a $2,000 refund for that amount of Conversion.