The deadline to file your 2021 tax return is only two months away. With that in mind, we want to provide important information that you may need to consider. The pandemic is still affecting the economy and the finances of many Americans. Here are some of the tax changes you need to know before you file.
Stimulus payments and Recovery Rebate Credits. For those who received stimulus payments (Economic Impact Payments) in the spring of 2021 you will need to report them on your tax return. If you didn’t receive the correct amount, you can claim a Recovery Rebate Credit to get the money you deserve.
In January, the IRS sent out Letter 6475 to those who received a stimulus payment indicating the amount. Unlike 2020, filers can use the amounts shown on your Letter 6475 to report your payment and claim any additional money. Please note that Letter 6475 only applies to the third round of Economic Impact Payments issued between March 2021 and December 2021.
Child Tax Credit. In 2021 the Child Tax Credit was expanded to provide more money for more families. With this change, up to half of the credit was paid as advance payments, while the other part can be claimed when you file. The IRS sent Letter 6419 in January indicating the amount of advance payment that you received. Filers will use the amounts shown on your Letter 6419 to report your advance payments and claim the rest of your credit.
Earned Income Tax Credit. 2021 expanded the maximum credit for childless workers from $538 to about $1,500. Additionally, changes around age limits generally lowered the bottom age limit to 19 and now allows for those without children to claim the credit if they are or older. The American Rescue Plan Act (ARPA) eliminated the current maximum age of 64 to claim the credit. Changes to the Earned Income Tax Credit are only in place for 2021 taxes.
The ARPA also allows individuals to use either their 2019 or 2021 earned income to qualify. If your 2019 earned income is larger than your earned income, you can choose to use your 2019 income to calculate your Earned Income Credit amount and that provides a larger credit (this is called the Lookback Rule). However, using your 2019 income may require some additional time to process your refund.
Child and Dependent Care Credit. For 2021 taxes, families may now claim a refundable credit of up to 50% of qualifying expenses, meaning they could claim a maximum credit of:
As a refundable credit, this tax benefit not only lowers the tax you owe, it can also mean getting money back.
Unemployment benefit taxability. In tax year 2020, you were able to exclude up to $10,200 of unemployment compensation as income. For 2021, the tax law changes back to what it was before 2020. Therefore, any unemployment compensation you received will be subject to income taxes.
Charitable contributions. A 2021 tax law change allows for a deduction for up to $600 in cash charitable contributions for those married filing jointly ($300 for individuals and married filing separately). This deduction is available to most filers whether you use the standard deduction or itemize your deductions.
Premium Tax Credit for health insurance. The Premium Tax Credit makes health insurance premiums more affordable for those who purchase healthcare benefits from the federal or a state marketplace. A larger tax credit was put in place for 2021 and 2022 for households to pay a smaller share of their income towards premiums, as a result they get a higher premium tax credit.
Required Minimum Distributions (RMDs). After being suspended for 2020, RMDs resumed for 2021. RMDs apply to all retirement plans except Roth IRAs. Just like in past years, you can delay your first RMD until as late as April 1 of the year following the one in which you reach the RMD age of 72 years old. In all subsequent years, you must take the required amount by Dec. 31. Also, just like in past years, if you’re working and contributing to a retirement plan sponsored by your employer (and don’t own more than 5% of the company), RMDs do not apply to that particular account until you retire. If you did not take your full RMD in 2021, a 50% tax penalty will apply on any required amount that was not taken out.
If you have not already done so, make sure that you consult with a tax professional or financial planning specialist to determine the effect the tax changes will have on your situation.
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