Here’s a quick summary of the tax code updates that may affect your 2021 federal tax return.
New for 2021
Advance Child Tax Credit Payments
Taxpayers who have received any advance Child Tax Credit payments this year will need the payment information for their 2021 tax return. If you were issued any payments, you should receive IRS Letter 6419 in January by mail with the total of your advance Child Tax Credit payments. This information may also be found in your IRS Online Account. If you already received more of the Child Tax Credit than you are eligible for, you may be required to return the overpayments on your 2021 tax return if you do not qualify for repayment protection.
Other Child Tax Credit Changes
In addition to half the credit being available as advance payments, the credit was made fully refundable, the maximum age was increase from under 17 to under 18, and the total value was increased. The total value of the Child Tax Credit was increased to $3,000 for qualifying children ages 6-17 and $3,600 for children 5 and under. Income phaseout ranges were reduced.
2021 Economic Impact Payment
Taxpayers who received any portion of the 2021 Economic Impact Payment issued this past spring or a plus-up payment should receive IRS Letter 6475 by mail in January. This notice will have the total amount issued and is needed to calculate the correct Recovery Rebate Credit on your tax return. This information may also be found in your IRS Online Account.
You may have also received IRS Notice 1444-C shortly after receiving the main payment, which should list your total minus any plus-up payments. Notice 1444-C looked like a letter from the White House rather than the usual IRS Notice format.
Child and Dependent Care Credit
The American Rescue Plan Act of 2021 increased the Child and Dependent Care Credit and made it refundable for the first time, only for tax year 2021. The top credit percentage of qualifying expenses increased from 35% to 50%. Eligible families can claim qualifying care expenses of up to $8,000 for one qualifying individual, up from $3,000, or $16,000 for two or more qualifying individuals, up from $6,000. This means that the maximum credit in 2021 of 50% for one dependent’s qualifying expenses is $4,000, or $8,000 for two or more dependents.
When figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses. The credit percentage is still subject to income phaseouts, but under the new law more people will qualify for the new maximum 50% credit rate. The adjusted gross income (AGI) level at which the credit percentage is reduced is raised substantially from $15,000 to $125,000. Above $125,000, the 50% credit percentage is reduced as income rises, plateauing at a 20% rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20% until reaching $400,000 and is then phased out above that level. It is unavailable for taxpayers with an AGI exceeding $438,000.
Charitable Contribution Deduction
The CARES Act charitable contribution provision has been extended to 2021 with some modifications. A deduction is available below-the-line for those who do not itemize for cash contributions to legitimate charities and is worth a maximum of $300 for single taxpayers or married filing separately, and $600 for married filing jointly. Charitable deductions must be supported by documentation.
Educator Expense Deduction
Eligible elementary and secondary school teachers are allowed a $250 above-the-line deduction for books, supplies, computer equipment (including related software and services), other equipment, and supplemental materials used by the eligible educator in their classroom. This was extended in 2020 to cover COVID-19 protective items (including masks, disinfectant, hand sanitizer, gloves, physical barriers, etc.) and applies to 2021 as well.
Employer Provided Dependent Care Assistance
The maximum amount of pre-tax money an employee can set aside in their dependent care FSA increased from $5,000 to $10,500 for 2021 only. This was done to compensate for the 2020 rollover funds many people ended up with when schools and daycares shut down. Note: This only applies if the employer has adopted this optional change. Check with your benefits administrator.
Student Loan Forgiveness Made Non-Taxable
The American Rescue Plan Act of 2021 made it so any student loan debt forgiven between December 31, 2020 and January 1, 2026 will not be treated as federal taxable income.
Annual Inflation Updates
The Single and Married Filing Separately standard deduction is $12,550 for 2021. Head of Household is $18,800, and Married Filing Joint is $25,100.
Standard Mileage Rate
The standard mileage rate for the cost of operating your car for business is 58.5 cents a mile. Please note that in addition to mileage you are also allowed to deduct tolls, parking, property taxes and interest. The standard mileage rate allowed for the use of your car for medical purposes is 16 cents a mile and the standard mileage rate for the use of your car for volunteer services for a charity is 14 cents a mile for 2021. (You can keep track of your mileage by using an App on your smart phone called Mile IQ. If you are self-employed and drive for business purposes, you need to keep track of time, place, and purpose for all your mileage driven. We suggest you take a picture of your odometer on January 1st and December 31st, and save receipts that document your mileage, such as oil change receipts.)
IRA and Retirement Account Contributions
The annual contribution limit for both Roth and Traditional IRAs increases to $6,000 for 2021 with an additional $1,000 additional if age 50 or older. Contributions to 401(k) and similar retirement plans are $19,500 for 2021 with a catch-up amount of $6,500 if age 50 or older. Self-Employment Pension Plan (SEP) maximum contributions increase to $58,000 for 2021.
Student Loan Interest Deduction
For 2021, certain taxpayers with qualified education loans are eligible for a $2,500 maximum deduction for interest paid. This amount is subject to phase-out for taxpayers with modified adjusted gross income in excess of $70,000 ($140,000 for joint returns). No deduction is available when modified adjusted gross income is $85,000 or more ($170,000 or more for joint returns).
Health Savings Accounts (HSAs)
The maximum HSA contribution increased to $3,600 for single coverage and $7,200 for family coverage in 2021, with an additional $1,000 allowed if age 55 or older. Please note that you have until April 15, 2022 to contribute to your HSA for a 2021 deduction.
For 2021, to qualify as a “high deductible health plan”, the annual deductible must not be less than $2,400 ($4,800 for family coverage) and not more than $3,600 ($7,150 for family coverage). The limit on annual out-of-pocket expenses (other than premiums) for covered benefits cannot exceed $4,800 ($8,750 for family coverage).
Gift Tax Exclusion
The annual exclusion for taxes on gifts remains unchanged at $15,000 for calendar year 2021. It will increase to $16,000 for 2022.
Alternative Minimum Tax
The Alternative Minimum Tax exemption amount for tax year 2021 is $73,600 and begins to phase out at $523,600 ($114,600 for married couples filing jointly with the exemption beginning to phase out at $1,047,200).
Earned Income Tax Credit
The 2021 maximum Earned Income Tax Credit amount is $1,502 for qualifying taxpayers with no children, $3,618 for one child, $5,980 for two children, and $6,728 for three or more qualifying children.
Student Loan Interest Deduction Threshold
The full $2,500 student loan interest deduction amount can be claimed by single taxpayers with MAGI of $70,000 or less and $140,000 or less for married joint filers.
Other Items to Note
Identity Protection Pin
An IRS Identity Protection PIN (IP PIN) is a six-digit number that prevents someone else from filing a tax return using your Social Security number. It is available to all taxpayers who can provide verification of their identity. We encourage you to take this extra step to secure your SSN against fraudulent federal returns.
After signing up for an IP PIN, you will be issued a new IP PIN each January to be used on any federal returns submitted that calendar year. You will need to provide this IP PIN annually to your trusted tax preparer. This includes spouses and any dependents listed who are signed up for the program. An e-filed return will be rejected if any of the SSN on it are associated with an IP PIN that was not provided.
New Verification Process for IRS Secure Account Holders
The IRS recently implemented new requirements to verify your identity when signing up for an account. Current account holders have until summer 2022 to complete the new verification process to maintain account access. Your identity will be verified by a third party called ID.me.
You will need: An email address, your Social Security Number or ITIN, a photo of your license or state ID OR your passport OR your passport card, and a mobile device that can take a selfie or a computer connected to a web cam.
If your documents cannot be digitally verified, you may be asked to enter a secure video call with a representative from ID.me to complete the process.
Need a Copy of Your Previous Return?
You can obtain a record of your past tax returns and other tax documents. IRS transcripts are often used to validate income and tax filing status for mortgage applications, student and small business loan applications, and during tax preparation. You can obtain them directly from the IRS using their Get Transcript online service.
The IRS will begin accepting returns Monday, January 24, 2022. Schedule early. Our calendar fills up fast as people begin to receive their W-2s. We cannot guarantee you an appointment before the April 18th deadline if you call after April 1st and we strongly suggest you schedule far earlier than that.