Welcome to the new year! And welcome to another interesting and challenging tax filing season. As you start putting together your materials to file your tax return, here are the major changes and how you can help make your situation easier.
- Economic impact payments. Millions of taxpayers qualified to receive economic impact payments from the IRS during 2021. Now comes the hard part. Did you receive your payment? Was is correct? Did you receive too much? Do you need to pay any of it back? The IRS states they will be sending out recaps of what they paid you, but do not solely rely on this. Between now and filing your tax return, review and compile what you received, when and for whom. That way your tax return can be filed to ensure you receive the full amount you are entitled to receive.
- Unemployment benefits. Unemployment benefits are taxable once again in 2021. However, the first $10,200 of benefits received in 2020 by taxpayers with an adjusted gross income (AGI) of less than $150,000 became exempt from tax. Unfortunately the tax-free nature of unemployment benefits in 2020 was made long after many of you filed your tax return. So, if this pertains to you, and you haven’t received a refund from a tax overpayment yet, you might need to file an amended 2020 return.
- The child tax credit. Not only did the credit per child increase from $2,000 to $3,000 (up to $3,600 for children under 6), the phaseouts were made more complex. Then Congress directed the IRS to spend millions to set up a program to automatically provide advance payments of the credit for the last six months of 2021. So your challenge is the same as the economic stimulus payment challenge. How much did you receive, was it too much, are you entitled to receive more, or do you need to pay it back? Once again, your tax return preparation will come to the rescue, but only if you properly document and provide documentation showing exactly what you received.
- Small business loans. The Paycheck Program Protection (PPP) loan program will also create complexity if you are a small business owner. Please be prepared to provide full documentation of what you received and under which program. While loan forgiveness is the law, properly recording your situation will be key. So gather your records—including what you received and when—for optimal tax protection.
- Dependent care credits. The available dependent care credit for qualified expenses incurred in 2021 is much higher than 2020, with much higher income phaseout levels. The maximum credit for households with an AGI up to $125,000 is $4,000 for one under-age-13 child and $8,000 for two or more children. The credit is gradually reduced if your AGI exceeds $400,000 and disappears completely above $440,000.
Given the changes in 2021, organizing your records and collecting the proper documentation will be more important than ever. If you have questions, please call for help.