Now that the filing season for 2020 tax returns is over, it’s time to start thinking about next year’s tax return, which may look different from prior years because of the pandemic relief bills, tax law changes, updates, new rules, and annual inflation adjustments.
The earlier you begin, the more you can potentially save, and to get a head start, we’re breaking down key tax changes to help you prepare for April 15. Check out this list of 6 tax changes so you can begin preparing today.
Child tax credit
For the tax year 2021, the child tax credit will be increased from $2,000 to $3,000 for children over age 5 and under age 18 and to $3,600 for children 5 and under. However, for those with modified adjusted gross income above $75,000 for individuals, $112,500 for heads-of-household, and $150,000 for married filing jointly, the credit is reduced gradually until the credit is $2,000 per dependent. The credit is further reduced for those with modified adjusted gross incomes of $400,000 for married filing jointly and $200,000 for all other filing statuses. The enhancement is that, generally, the credit is fully refundable and now includes children who are 17 years old. The credit is claimed on your tax return like in prior years. Another important change to note is that at least half of the credit is paid in advance with monthly installments that began in July and will end in December 2021. The other half of the credit is claimed on your 2021 tax return. You can opt out of the monthly payments using the tool at the IRS website if you do not want to receive some or all the advance payments.
Child and Dependent Care Tax Credit
This credit is now fully refundable, with the maximum credit percentage increasing from 35% to 50%. For 2021, the credit allows for up to $8,000 in expenses for one child or disabled person and $16,000 for more than one, which makes the maximum credit at $4,000 for one person and $8,000 for more than one. The credit percentage decreases as your adjusted gross income increases above an adjusted gross income of $125,000. Those with adjusted gross incomes greater than $438,000 will not be eligible to claim the credit.
Recovery Rebate Credit (aka stimulus checks)
If you received the third stimulus check in the spring of 2021, which was based at $1,400 per eligible person, you should have received a Form 1444-C from the IRS documenting the stimulus payment received. If you did not receive Form 1444-C or did not keep the form, document the amount you received by keeping the bank statement or deposit slip from the time you received the payment. You will need to know this amount as the IRS will request this information on your 2021 tax return. The 2021 recovery rebate credit is calculated based on your actual 2021 adjusted gross income. The prepayments on this credit, commonly known as stimulus checks, are estimates based on prior-year tax returns. If you did not receive the credit prepayment or received only a partial prepayment, you may be eligible for additional credit. If you received the full stimulus, you would not receive additional credit, but would still need to report the amount received. If you received a prepayment for an amount greater than you are eligible you will not have to repay the amount to the IRS. As a reminder, the stimulus payment is not taxable income.
Required Minimum Distributions, or RMDs, are no longer suspended, meaning those who are at least 72 years old by December 31 are required to take the RMD of their retirement funds. If this applies to you or your spouse, talk to your accountant about how to calculate your RMD using the updated tables for 2021.
People who claimed the standard deduction can also claim up to $300 in charitable cash contributions in addition to the standard deduction. This deduction applies to each individual person, so married couples can deduct up to $600 on a joint return.
Self-employed people, owners of LLCs, S-corps, and pass-through entities can deduct 20% of their qualified business income for 2021 unless claiming income of $329,800 if filing jointly, or $164,900 for individuals. In addition, certain business meals can be deducted at 100% for 2021. Self-employment taxes cannot be deferred as they were in 2020, and the $262,000 cap for single filers, $524,000 for married filing jointly, on deductible business losses has been reinstated.
In addition to these changes, there are a few proposed tax law changes currently in Congress. These changes include an increase in the individual income tax rate for those in the 37% tax bracket to 39% percent, increasing the long-term capital gains rate for those with an adjusted gross income of $1 million or more, extending the 2021 enhanced child tax credit through 2025, making permanent the expanded child and dependent credit, and others.
If you believe these changes may impact you or your business, talk to your accountant now so there are few surprises come April 2022.