The recently-passed American Rescue Plan Act contains several tax breaks for you and your family. Here are the major provisions of the bill that could mean more money in your pocket during the 2021 tax year.
Child tax credit (CTC)
The CTC for 2021 increases from $2,000 to $3,000 for kids ages 6 to 17 and $3,600 for kids ages 5 and under.
To receive the full tax credit your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household).
If your income is above the aforementioned thresholds, you can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint).
You can receive up to 50% of your 2021 child tax credit in 6 monthly payments starting July 2021. The IRS is warning, however, that this July start date may be delayed because a computer system still has to be built to handle these monthly payments.
Child and dependent care credit (DCC)
If you and your spouse work and have children in daycare, or have an adult that you care for, you may be eligible for a larger tax credit in 2021.
You can now spend up to $8,000 in dependent care expenses for one qualifying dependent and get a 50% tax credit. This results in a maximum credit of $4,000 (up from $1,050).
If you have more than one qualifying dependent, you can spend up to $16,000 in dependent care expenses and get a 50% credit. This results in a maximum credit of $8,000 (up from $2,100).
To receive the full tax credit, your adjusted gross income must not exceed $125,000.
Dependents can include people of all ages, not just kids, as long as they meet the dependent qualifications.
Earned income tax credit
If you’re a household with no kids, the maximum earned income tax credit increases from $543 to $1,502.
More taxpayers qualify for the credit. The lower age limit for receiving the credit decreases from age 25 to age 19. The upper limit of 65 for receiving the credit is eliminated. There is no upper age limit for 2021.
You may use either your 2019 income or your 2021 income when calculating your credit to obtain the maximum credit.
A third round of stimulus payments in the amount of $1,400 is being sent to qualified taxpayers.
The payment phases out for income over $75,000 for single taxpayers, $112,500 for head of household taxpayers and $150,000 for married couples.
Action to take
Look for updates on the advance payments for the child tax credit. The IRS is sorting out how to get half of your child tax credit to you in 2021. Stay tuned for updates as to whether the payments will begin in July or if they will be delayed. You may also opt out of this early payment, but will need to wait for instructions on how to do so.
Consider increasing dependent care expenses. Look ahead to the rest of 2021 and consider if you should increase your dependent care expenses to take advantage of the significant increase in this credit. If you increase your dependent care expenses in 2021, remember you won’t be able to include the same amount of expenses when calculating your credit in 2022, as this tax credit increase is currently for 2021 only.
Conduct a tax forecast. With the dramatic increase in these credits, you may want to estimate next year’s tax bill. It may make sense to adjust your withholdings to account for a lower tax obligation.
Be conservative when forecasting your earned income tax credit. It is uncertain how the expanded earned income tax credit will impact those over 65 when you have no children. For example, are Social Security benefits considered earned income when calculating the earned income tax credit? Does the larger standard deduction for those over 65 affect the earned income tax credit calculation? Until clarification is issued by the IRS, you may wish to be conservative about the credit amount you’ll receive.
Congress’ recent move to retroactively make a portion of 2020 unemployment income tax-free is creating havoc during this year’s tax filing season. Here is what you need to know.
Unemployment compensation was received by millions of Americans during 2020 because of the pandemic. While unemployment income was necessary for many who lost a job, it’s also normally classified as taxable income to be reported on your tax return. Recently-passed legislation now makes the first $10,200 of 2020 unemployment compensation tax-free on your tax return.
The new legislation which contains this tax break didn’t become law until March of 2021, a full three months after the end of the tax year and after millions of Americans had already filed their 2020 tax return!
Understanding your situation
If you’ve already filed your 2020 tax return: Wait for further instructions. The IRS is trying to figure out a way to automatically apply this tax break for taxpayers who have already filed their 2020 tax return. This will avoid the need to file an amended tax return. There is no need to call at this time as the IRS has not provided further guidance.
If you HAVE NOT filed your 2020 tax return: The IRS has issued guidance on how to report this tax break on your 2020 tax return if you have not already filed. You will be notified once your tax return has been prepared.
Tax deadline moved to May 17. Because of all this havoc, the April 15 deadline for individual tax returns is now May 17. This extension applies only to Form 1040s. First quarter estimated tax payments for the 2021 tax year are still due by April 15.
Be assured you will be informed once the IRS issues further instruction on how to claim your tax break. In the meantime, enjoy the extra tax savings you’ll get sometime in the near future!
With the April 15 tax filing deadline right around the corner, here are answers to some common tax questions.
When will I get my refund? The pandemic and additional stimulus payments will, in all probability, delay refund payments. But as of now here are the old wait times to receive your refund.
* E-file return with a direct deposit – 1 to 3 weeks
* E-file return with a mailed check – 1 month
* Paper file return with a direct deposit – 3 weeks
* Paper file return with a mailed check – 2 months
NOTE: If you want exact information on the status of YOUR refund go to www.irs.gov/refund and follow their instructions.
What’s the most common delay in completing a tax return? Missing items! W-2 and 1099 forms are some of the most common tax documents to go missing. If you have multiple jobs, whether full-time or part-time, you’ll be getting multiple documents in the mail. It’s easy to lose track of all these documents if you don’t have one place you put them once received.
Can I still get a stimulus payment? If you’re still waiting on either the 2020 or 2021 stimulus payment, file your 2020 tax return and claim the Recovery Rebate Credit. This is why it is important to keep track of any payments you receive from the government during the year. You will need them to account for any missing payments or underpayments.
Can I correct a tax form that has an incorrect dollar amount? If you receive a tax document with incorrect information, contact the company that issued the document and try to get it fixed immediately. If you can’t get a corrected form right away, include both the incorrect form and the correct dollar amount when turning in your tax documents to have your return prepared.
Can I deduct charitable contributions if I don’t itemize? In 2020 you can claim a $300 charitable contribution deduction regardless of whether or not you itemize your deductions. If you missed this window of this above-the-line donation in 2020, never fear as it is also available in 2021 with an increased limit to $600 for married couples. So, save those donation receipts!
Is this taxable? While there are always exceptions, the most common taxable items that are questioned include unemployment benefits and withdrawals from non-Roth retirement accounts. Some things, like Social Security, are often, but not always, taxable.
If you or your business received funds from the Paycheck Protection Program (PPP), the recently passed Emergency Coronavirus Relief Act of 2020 will help to dramatically cut your tax bill. Here’s what you need to know.
The PPP program was created by the CARES Act in March 2020 to help businesses which were adversely affected by the COVID-19 pandemic. Qualified businesses could apply for and receive loans of up to $10 million. Loan proceeds could be used to pay for certain expenses incurred by a business, including salaries and wages, other employee benefits, rent and utilities.
If the business used at least 60% of loan proceeds towards payroll expenses, the entire amount of the loan would be forgiven.
While the CARES Act spelled out that a business’s forgiven PPP loan would not be considered taxable income, the legislation was silent about how to treat expenses paid for using PPP loan proceeds if the loan was ultimately forgiven.
Congress intended for these expenses to be deductible for federal tax purposes. But since the legislation was silent on this issue, the IRS swooped in and deemed these expenses to be nondeductible.
There was considerable debate over the latter half of 2020, with Congressional politicians explaining that their intent was that the expenses be deductible and the IRS responding “Too bad, they’re nondeductible.”
Congress overruled the IRS’s position in the Emergency Coronavirus Relief Act of 2020. The legislation officially makes deductible for federal tax purposes all expenses paid for using proceeds from a forgiven PPP loan.
Stay tuned for updates as to how this new legislation affects your business.
No one likes surprises from the IRS, but they do occasionally happen. Here are some examples of unpleasant tax situations you could find yourself in and what to do about them.
An expected refund turns into a tax payment. Nothing may be more deflating than expecting to get a nice tax refund and instead being met with the reality that you actually owe the IRS more money.
What you can do: Run an estimated tax return and see if you may be in for a surprise. If so, adjust how much federal income tax is withheld from your paycheck for the balance of the year. Consult with your company’s human resources department to figure out how to make the necessary adjustments for the future. If you’re self-employed, examine if you need to increase your estimated tax payments due in January, April, June and September.
Getting a letter from the IRS. Official tax forms such as W-2s and 1099s are mailed to both you and the IRS. If the figures on your income tax return do not match those in the hands of the IRS, you will get a letter from the IRS saying that you’re being audited. These audits are now done by mail and are commonly known as correspondence audits. The IRS assumes their figures are correct and will demand payment for the taxes you owe on the amount of income you omitted on your tax return.
What you can do: Assuming you already know you received all your 1099s and W-2s and confirmed their accuracy, verify the information in the IRS letter with your records. Believe it or not, the IRS sometimes makes mistakes! It is always best to ask for help in how to correspond and make your payments in a timely fashion, if they are justified.
Getting a tax bill for an emergency retirement distribution. Due to the pandemic, you can withdraw money from retirement accounts in 2020 without getting a 10% early withdrawal penalty, but you’ll still have to pay income taxes on the amount withdrawn. If you don’t plan for this extra tax you will be surprised with an additional tax bill. And you may still get an underpayment penalty bill from the IRS because you did not withhold enough during the year. You may also still receive an early withdrawal penalty in error because the IRS is still scrambling to update their systems with all of this year’s tax relief changes.
What you can do: Set aside a percentage of your distribution for taxes. Your account administrator may withhold funds automatically for you when you request the withdrawal, so check your statements. Your review should be for both federal and any state tax obligations. If the withholding is not sufficient, consider sending in an estimated tax payment. And if you are charged a withdrawal penalty, ask for help to correspond with the IRS to get this charge reversed.
No one likes surprises when filing their taxes. With a little planning now, you can reduce the chance of having a surprise hit your tax return later.
Here are several new tax laws passed this year to consider as you start planning your 2020 tax obligation.
Make up to $300 of charitable contributions. For the 2020 tax year only, an above-the-line deduction of $300 is available to all Americans who want to make a charitable contribution. You can donate to more than one charity, but the total amount of contributions must be $300 or less to be able to take an above-the-line deduction. While you will still need to itemize your deductions if you want a tax break for donations greater than $300, this above-the-line deduction for $300 or less helps alleviate the elimination of the charitable deduction for most taxpayers. (NOTE: $300 is the maximum above-the-line deduction per tax return, regardless of filing status.)
What you need to do. Donate $300 to your favorite charitable organization(s) by December 31, 2020. You must receive a written acknowledgment from the charitable organization(s) to which you made the $300 contribution before filing your 2020 tax return.
Donate up to 100% of your income. The normal contribution limit of 60% of your income is suspended for 2020, allowing you to contribute as much of your income as you want to various charities.
What you need to do. While only a tax break for a few taxpayers, this initiative is meant to help struggling charities during the pandemic. If you are considering additional giving, you must make your charitable contributions by December 31, 2020. Remember to obtain written acknowledgment from each charity you made a donation to before filing your 2020 tax return.
Use retirement savings to pay for birth or adoption expenses. Adding a child to your family is very expensive. To help with these costs, you can now cash out up to $5,000 per parent from your retirement accounts to pay for birth and/or adoption expenses. While the withdrawal won’t be hit with the 10% early withdrawal penalty, you’ll still have to pay income taxes.
What you need to do. Consult your financial advisor or benefits coordinator to find out how to withdraw the funds from your retirement accounts. Since this withdrawal will deplete your retirement savings, first consider whether you have other sources of cash to cover expenses.
No age limit for contributing to IRAs. You can now contribute to an IRA regardless of your age as long as you have earned income. The old rule prevented you from contributing to an IRA past age 70½. The IRA contribution limit for 2020 is $6,000 if you’re under age 50 and $7,000 if you’re over age 50.
What you need to do. Consider getting a part-time job or doing some consulting work if you project that you won’t have earned income by the end of 2020. You can then use this earned income to fund your traditional or Roth IRA.
A letter in the mailbox with the IRS as the return address is sure to raise your blood pressure. Here are some tips for handling the situation if this happens to you:
Stay calm. Try not to overreact to the correspondence. They are often in error. This is easier said than done, but remember the IRS sends out millions of notices each year. The vast majority of them correct simple oversights or common filing errors.
Open the envelope. You would be surprised at how often people are so stressed by receiving a letter from the IRS that they cannot bear to open the envelope. If you fall into this category, try to remember that the first step in making the problem go away is to simply open the correspondence.
Carefully review the letter. Understand exactly what the IRS thinks needs to be changed and determine whether or not you agree with its findings. Unfortunately, the IRS rarely sends correspondence to correct an oversight in your favor, but its assessment of your situation is often wrong.
Respond timely. The correspondence should be very clear about what action the IRS believes you should take and within what timeframe. Delays in responses could generate penalties and additional interest payments.
Get help. You are not alone. Getting assistance from someone who deals with this all the time makes going through the process much smoother.
Correct the IRS error. Once the problem is understood, a clearly written response with copies of documentation will cure most of these IRS correspondence errors. Often the error is due to the inability of the IRS computers to conduct a simple reporting match. Pointing the information out on your tax return might be all it takes to solve the problem.
Use certified mail. Any responses to the IRS should be sent via certified mail. This will provide proof of your timely correspondence. Lost mail can lead to delays, penalties and additional interest on your tax bill.
Don’t assume it will go away. Until a definitive confirmation that the problem has been resolved is received, you need to assume the IRS still thinks you owe the money. If no correspondence confirming the correction is received, a written follow-up will be required.
Ah, summer. The weather is warm, kids are out of school, and it’s time to think about tax saving opportunities! Here are five ways you can enjoy your normal summertime activities and save on taxes:
Rent out your property tax-free. If you have a cabin, condo, or similar property, consider renting it out for two weeks. The rental income you receive on property rented for less than 15 days per year is not considered taxable income. In addition, you can still deduct your mortgage interest expense and property taxes in full as itemized deductions! Track the rental days closely — going over 14 days means all rent is taxable and rental income rules apply.
Take a tax credit for summer childcare. For many working parents, the summer comes with the added challenge of finding care for their children. Thankfully, the Child and Dependent Care Credit can cover 20-35 percent of qualified childcare expenses for your children under the age of 13. Eligible types of care include day care, nanny fees and day camps (overnight camps and summer school do not qualify).
Hire your kids. If you own a business, hire your kids. If you are a sole proprietor and your child is under age 18, you can pay them to work without withholding or paying Social Security and Medicare tax.
Have a garage sale. In general, the money you make from a yard or garage sale is tax-free because you sell your goods for less than you originally paid for them. Once the sale is over, donate the remaining items to a qualified charity to get a potential charitable donation deduction. Just remember to keep a log of the items you donate and ask for a receipt.
Start a Roth IRA for your children. Roth IRA contributions are limited to the amount of income your child earns, so earned income is key. This can include income from mowing lawns or selling lemonade. Start making contributions as soon as your child makes some money to take advantage of the tax-free earnings available in a Roth IRA.
Taking the time this summer to execute these tips can put extra money in your pocket right away and provide you tax-saving happiness in the future.
Avoid hard-won experience and costly mistakes by taking advantage of these five personal finance tips.
Pay yourself first – Paying yourself first means taking a percentage of everything you earn and saving it. Consider it as important as any other bill you pay each month. This is a fundamental rule of personal finance that when used properly can help build an emergency fund and save you from living paycheck to paycheck.
Calculate compound interest by using the Rule of 72 – You can roughly calculate the number of years compound interest will take to double your money using the Rule of 72. Simply divide 72 by the rate of return to rough out how long it takes to double your money. For example, 10 percent compound interest will double a sum in 7.2 years; 8 percent in nine years. It’s a concept that helps us understand the power of saving and investment.
Avoid debt – Unpaid debt is like compound interest, but in reverse. If left unaddressed, it grows exponentially over time as interest and fees add to the original balance due. The result is that you have to work harder and earn more to pay for the items you purchased. Why not save first, then purchase your dream item? When done this way, the purchase price is limited to what you paid for the item, rather than adding the burden of debt over time.
Understand amortization – When a bank loans you money, it gives you a certain interest rate and a set number of years to pay it back. Each payment you make contains interest as well as a reduction of the amount owed, called principal. Most of the interest payments are front-loaded, while the last few payments are virtually all principal. A smart consumer knows this and tries to make additional interest payments at the beginning of the term. This will dramatically reduce the number of payments required to pay back the loan.
Take advantage of tax deductions, credits and capital gains – Tax laws are complicated and made even more complex when the rules change. There are many tax deductions and credits to take advantage of, as well as strategies to minimize capital gains tax. Why leave money on the table just because you don’t know the rules? Ask for help and ask for it early in the year. The power of getting the right tax plan in place every year is definitely something everyone should know about.
As the year draws to a close, there are several tax-saving ideas you should consider. Use this checklist to make sure you don’t miss an opportunity before the year is out.
Retirement distributions and contributions. Make final contributions to your qualified retirement plan, and take any required minimum distributions from your retirement accounts. The penalty for not taking minimum distributions can be high.
Investment management. Rebalance your investment portfolio, and take any final investment gains and losses. Capital losses can be used to net against your capital gains. You can also take up to $3,000 of capital losses in excess of capital gains each year and use it to lower your taxable ordinary income.
Last-minute charitable giving. Make a late-year charitable donation. Even better, make the donation with appreciated stock you’ve owned more than a year. You often can make a larger donation and get a larger deduction without paying capital gains taxes.
Noncash donation opportunity. Gather up non-cash items for donation, document the items, and give those in good condition to your favorite charity. Make sure you get a receipt from the charity, and take a photo of the items donated.
Gifts to dependents and others. You may provide gifts to an individual of up to $14,000 per year in total. Remember that all gifts given (birthdays, holidays, etc.) count toward the annual total.
Organize records now. Start collecting and organizing your end-of-year tax records. Estimate your tax liability and make any required estimated tax payments.