It’s that time of year again when CPAs are locked in dark rooms crunching numbers on a laundry list of IRS forms and ordinary citizens scramble to gather their appropriate tax forms before the ever-looming tax deadline.
Tax time tends to be exceptionally stressful for most people. To complicate things further, since the pandemic began in 2020, like everything else, we really haven’t had a “normal” tax season. While tax laws are always changing, there have been numerous special temporary tax provisions to try and alleviate some of the financial burdens of the pandemic.
Like 2020, there are a variety of special tax rules for filing your taxes for 2021. Here’s what you should know about your 2021 tax return so that you don’t overpay your taxes this year.
Advance Child Tax Credit
The first couple of changes we’ll discuss in this post have to do with child tax credits, the first of which is appropriately called the Child Tax Credit. Taxpayers with certain qualified children can claim a tax credit on their return. This credit amount was increased significantly from $2,000 to $3,000 for children under 18, and to $3,600 for those under the age of 6 as of December 31, 2021. (Note that in all years except 2021, the child tax credit applies to children under age 17, not 18).
Not everyone can claim this extra credit, though. If your adjusted gross income (AGI) was over $150,000 if married filing jointly or $75,000 if filing single, the credit starts to phase out (be reduced) by $50 for every $1,000 over this limit. This phaseout only applies to the “extra” credit, though. The standard $2,000 doesn’t start to phase out until $200,000 of AGI if single and $400,000 if married, like it normally does.
To complicate things further, to assist struggling families, the government began paying out this credit in advance to eligible taxpayers. If you’re one of these eligible individuals, you may have seen extra money from the IRS hitting your bank account each month. Now that we’ve turned the calendar to 2022, these payments have stopped, but the reporting still needs to be done on your 2021 tax return.
To get the information on the amount of the credit paid in advance, the IRS is sending out letters (called Letter 6419, to be precise). This letter will detail the amount you received in advance, which will be subtracted from the total credit so that, on your return, you are only receiving the remaining amount allowed. Alternatively, you can register an account online with the IRS to get this information.
If that wasn’t enough, if you received an advance credit based on your 2020 income but were actually ineligible because of your 2021 income, you may need to “pay back” some of the advance payments on your return. There are certain safe-harbor provisions so that, depending on your income, you may not need to pay back everything. However, these calculations and phaseouts are quite complicated and go beyond the scope of this post. If this applies to you, we suggest speaking with a qualified tax professional to ensure everything is reported correctly on your tax return.
Child and Dependent Care Credit
The second child-related credit that changed in 2021 is the Child and Dependent Care Credit. One of our advisors, Jonathan Harrington, went into great detail on how this enhanced credit worked in 2021, so we won’t rehash all the details here.
The big thing to keep in mind is that the amount of eligible expenses increased from $3,000 to $8,000 for one child, and from $6,000 to $16,000 for two or more children. The credit amount based on those eligible care expenses also increased from its usual 20% (although it could be as high as 35% for lower-income individuals) to 50% of those expenses if your AGI is below $125,000. This means that if you are eligible and max out the qualified expenses, your credit could be as high as $4,000 for one child and $8,000 for two or more children. Considering the maximum credit in usual tax years is “only” $2,100 ($6,000 * 35%), this can be quite a lot of money back when you file your return.
The important thing here is to make sure you have receipts for those expenses paid. Also, if you normally don’t report this because you don’t think it’s worth the hassle, the increased percentage is an additional incentive to report these expenses this year. For more details on what expenses are eligible and how to report them, please see the IRS page.
We’ve talked a lot about how most people can no longer deduct their charitable contributions because of the tax-law changes in 2018. There are certainly some creative ways around this, depending on your situation, but most people will still claim the increased standard deduction.
In 2020, there was a special tax provision that allowed people to deduct a modest amount of charitable giving ($300) to 501(c)(3) charities even if they claimed the standard deduction. This provision carried forward to 2021 as well, and those who file single can deduct $300 again, but those who file married can deduct twice that ($600). Note that in-kind donations (gifts of stock, clothes, or other goods) and donations to donor advised funds do not qualify for this deduction.
It’s only a modest deduction, but still better than nothing! So, even if you haven’t been able to deduct your charitable donations in recent years, you should gather any receipts you have (cash/check/credit card) from eligible charities to ensure you are claiming this deduction.
Third Stimulus Payment
It seems like a lifetime ago, but a third stimulus payment was paid out early in 2021. Like the ones before it, whether you received it or not was initially based on the most recent tax return the IRS had on file. However, although they were basing the advance payment on your prior year’s return, the actual eligibility determination is based on what your AGI was in 2021.
The credit is $1,400 per eligible person. This includes taxpayers plus each dependent on your return. To be eligible for the full credit, your AGI needed to be below $75,000 if single or $150,000 if married. The credit completely phases out if your income is above $80,000 if single or $160,000 if married. It’s a very narrow band that determines whether you are eligible.
If you did not receive the credit in advance, you can claim this credit on your tax return if your income is low enough. However, unlike the advance Child Tax Credit, if you received the credit but your income is above the phaseout range, you DO NOT need to pay any of the credit back. You get to keep the whole thing without repercussions.
ACA Subsidy Benefits
The vast majority of Americans who are working get their health insurance through their employer. However, during the pandemic, many people lost their jobs and were left with less-desirable options. One common alternative was getting insurance through the health care exchange. These are plans that are unique to each state but are subsidized by the government, depending on your income.
Since these plans are not being supported by an employer, unless you get a health insurance subsidy, you are paying for the plans entirely out of pocket, which can be quite expensive. It is bad enough to lose a job. But to lose a job and have significantly higher health care costs just adds insult to injury.
In 2021 only, if you received unemployment income for at least one week and were on the health care exchange, you are treated as being in the lowest income band so that you are eligible for the maximum subsidy available in your state. This is regardless of how much total income you earned in 2021. So, when filing your taxes, make sure that if this applies to you, you are receiving the full credit available. This only applies to 2021, so if you receive unemployment in 2022, the standard income rules apply to determine the amount of your subsidy, if anything.
Tax Return Deadline
April 15 used to be a day that was circled on everyone’s calendars to make sure they had their tax return done by then. But, in the past two years, because of the pandemic and the enormous tax changes with it, the IRS pushed the deadline out. This, however, is not currently the case for tax filing this year. Technically, the deadline is April 18 (due to a holiday), and there are no current talks this year to extend the deadline further. This means if you were relying on having more time to do your return, instead plan on it being done for mid-April as it has been for most years.
We have talked about this a few times, but there are many tax changes that will impact you when it comes to preparing your 2021 tax returns. Of course, tax laws will change in the future, but the dramatic differences we’ve seen over the past couple of years may be ending.
No one likes paying more taxes than they must. That is why it is crucial to be aware of the tax code for 2021 to make sure you are not missing something and losing out on some generous tax credits.
Nick Prigitano, CFP® is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisor.