Does it seem like you just did your taxes? Even though you may have filed your individual return during the summer of last year, your 2021 tax return is due on April 18th! There are lots of changes this year, so let’s go over some of the most important ones.

The Recovery Rebate Credit/Coronavirus Stimulus Checks

Last year a third round of stimulus checks went out to most Americans. The full amount was $1,400 plus an additional $1,400 for each dependent. Higher income earners did not receive the full amount, as payment phase-outs began at the following levels:

  • Single Filers: adjusted gross income over $75,000
  • Head of Household: adjusted gross income over $112,500
  • Married/Joint Filers: adjusted gross income over $150,000

If you were eligible for a third-round check and you didn’t receive one, or you received less than what you are entitled to, you are eligible to claim the recovery rebate credit. You can think of the stimulus checks as an advance payment of this credit. For most, the stimulus check they received will match what they qualified for, so the credit will equal $0. If your stimulus check was more than your credit amount, you do not have to repay the difference to the IRS!

The Child Tax Credit (CTC)

The American Rescue Plan increased the amount of the CTC compared to the 2020 tax year. For 2021, the CTC increased to $3,000 total for most kids, and $3,600 for kids five years old or younger.

For families earning higher incomes, CTC phase outs (credit reductions) begin at the following levels:

  • Single Filers: adjusted gross income over $75,000
  • Head of Household: adjusted gross income over $112,500
  • Married/Joint Filers: adjusted gross income over $150,000

Many taxpayers have already received up to half of the 2021 CTC in the form of advance monthly payments that began on July 15th 2021. What some people don’t realize is that if they receive payments in excess of what they qualify for, they will have to repay that excess amount when they file their 2021 tax return. If you qualify for a credit that is greater than the monthly payments that your family received, you can claim the remaining balance on your return. Some filers chose not to receive the advance payments by opting out on the IRS’ online portal, and instead will pay or claim what they owe when they file.

The Child and Dependent Care Tax Credit

The Child and Dependent Care Expense Credit is refundable for the 2021 tax year. The dollar limit on expenses paid is increased from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying people. The maximum percentage of 35% is increased to 50% for adjusted gross income less than $125,000 with the credit percentage phasing out at higher income levels.

Unemployment Compensation is Taxable Again

Taxpayers who received unemployment benefits in 2020 and had incomes under $150,000 did not have their benefits taxed. However, this does not extend to the 2021 tax year. The IRS will treat unemployment compensation like normal wages, which means that you may owe taxes if you received unemployment compensation in 2021.

More Workers Qualify for the Earned Income Tax Credit (EITC)

The American Rescue Plan greatly expanded access to the EITC. Eligibility for the EITC depends on both income level and the number of children you have. For the 2021 tax year, the minimum age to qualify for the EITC has been lowered to 19, and there is no longer a maximum age. The maximum credit for childless workers has also been raised to $1,502.

Important Changes for Self-Employed People

Many tax policies for self-employed people and owners of pass-through entities like S Corporations and LLCs have been in flux since the COVID-19 pandemic began. For the 2021 tax year:

  • The 2020 flexibility that allowed the self-employed to claim a credit for COVID-19 related sick or family leave has been extended through September 30, 2021. You can claim ten days for yourself between January 1, 2021 and September 30, 2021, as well as up to 60 days of family leave.
  • Business meals are now 100% deductible for 2021 and 2022.
  • Unlike 2020, self-employment taxes cannot be deferred for the 2021 tax year.
  • The old maximum for deductible business losses has been reinstated at $250,000 for single filers and $500,000 for joint filers.

$300 Charitable Gift Deduction – Available for Filers Who Take the Standard Deduction!

This flexibility was extended to taxpayers last year. It has been extended to 2021 with an important new twist. Last year only one $300 credit was permitted per return, so joint filers received the same deduction as single filers. For 2021, one deduction is allowed for each person, so join filers can deduct as much as $600!

Education: A Big Deduction is Gone, and Tax Relief is Available for Some Student Debt

  • Students lost a big deduction for the 2021 tax year. The Tuition and Fees deduction was axed for 2021, which was worth up to $4,000.
  • For the 2021-2025 tax years, student loan debt that is forgiven or canceled for less than the total owed will not be considered taxable income. Normally the difference between what is owed and the amount the debt is settled for is considered taxable income.
  • Also, the 2020 tax break that allowed employers to pay up to $5,250 of student loans without increasing their employee’s tax liability has been extended through 2025.

Take the Next Step. Let’s Talk Today!

Tax preparation is more than filling out a form and checking boxes. You need an experienced accountant on your side who takes the time to understand your unique tax situation. Tortolano & Company goes above and beyond to minimize your tax liability. We never apply a “one-size-fits-all” approach to any client. Give us a call today, and ask us hard questions. We have answers! Whether you’re expecting a child, planning for retirement, starting a business, or simply looking to slash your tax bill, we can help! Don’t wait until the last minute, get started today!

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