Highlights of a few key issues to watch for as you get ready to have your 2021 tax return prepared.
Usually, if you choose to claim the standard deduction, you cannot deduct your charitable contributions. For 2021, if you don’t itemize deductions, you may deduct up to $300 ($600 if Married Filing Jointly) on your 2021 tax return for cash contributions made to most charitable organizations.
If it’s better for you to itemize deductions, you can elect to apply a 100%-of-AGI deduction limit for cash contributions made to most charitable organizations during 2021. Without this election, the usual percentage limit applies (normally 60%), and the nondeductible amount carries over up to five years. Remember to obtain an acknowledgment letter from the charity before filing your return and retain a canceled check or credit card receipt for contributions of cash.
Child and dependent care credit:
For 2021 only, the child and dependent care credit increased significantly and is fully refundable even if you have no tax liability, therefore remember to keep track of your work-related child care expenses. The dollar limit for eligible expenses is $8,000 for one child and $16,000 for two or more qualifying children. If your income is $125,000 or less, you get the maximum 50% credit rate. Otherwise, if your income is more than $125,000, the 50% rate decreases as your income rises. The credit becomes unavailable when your income exceeds $438,000.
In addition, you may be eligible to exclude up to $10,500 ($5,250 if MFS) of employer-provided dependent care benefits from gross income. However, you cannot use any child care expenses paid with these tax-free benefits for the child and dependent care credit.
Child tax credit:
For 2021 only, the child tax credit (CTC) increased from $2,000 to $3,000 for each child under age 18, or $3,600 for each child under age 6. The additional amount ($1,000 or $1,600, respectively) is reduced when income exceeds $150,000 for married taxpayers filing a joint return (MFJ) and qualifying widow(er)s (QW), $112,500 for heads of household (HOH) and $75,000 for single taxpayers. The normal $2,000 credit amount phases out as usual at $400,000 for MFJ and $200,000 for all others. Thus, higher income taxpayers may lose some of the credit but not all of it. It’s also fully refundable if you have no tax liability.
You also probably noticed that advance CTC payments were made monthly from July through December 2021. These payments were estimates of your 2021 CTC, generally based on your 2020 tax return. If you received advance payments in excess of the CTC allowed on your 2021 return due to a change in circumstances, you may have to repay some or all of the excess amount. There is some repayment protection depending on your income level. However, if your income equals or exceeds $120,000 for MFJ or QW, $100,000 for HOH or $80,000 for single or MFS, plan on repaying the entire excess amount as additional income tax on your 2021 tax return.
Education tax benefits:
For 2021, there is no tuition and fees deduction, but you might benefit from the lifetime learning credit if your income is below $90,000 ($180,000 if MFJ), which matches the income limitations for the American opportunity tax credit.
COVID-19 emergency financial aid grants under the CARES Act are excluded from gross income, but qualified education expenses paid with these tax-free grants can still be used to claim an education credit.
Premium tax credit:
In general, if you purchase health insurance through the Marketplace, you don’t qualify for any premium assistance when your income is too high. However, for 2021 and 2022, if your household income is more than 400% of the federal poverty line (FPL), you may be eligible to claim the premium tax credit (PTC) and will not pay more than 8.5% of your income for coverage.
Earned income credit:
If your 2019 earned income was more than your 2021 earned income, you can use your 2019 earned income to determine the earned income credit (EIC) on your 2021 tax return. You may benefit from this provision if your income went down after 2019 due to the pandemic, or any other reason, and you’re eligible for the EIC.
For 2021 only, the minimum age to claim the EIC without any children decreased from age 25 to age 19 for most taxpayers (age 24 for certain students), and the maximum age limit was eliminated. Therefore, if you’re a recent high school graduate or retirement age, you might qualify for the childless EIC for 2021, if you meet all the other requirements.
In January 2022 look out for these letters from the IRS:
- Letter 6419 – Advance Child Tax Credit Payments
- Letter 6475 – Economic Impact (stimulus) Payment
It is important to retain these letters because using incorrect advance child tax credit or economic impact payment amounts will cause delays in tax return processing and the issuance of your refund if any.
Esther Phahla is a Certified Public Accountant and Certified Tax Strategist in Temecula. She is the Best Selling Author of tax planning books, “Why Didn’t My CPA Tell Me That” and “10 Most Expensive Tax Mistakes That Cost Business Owners Thousands”. She also holds a Masters of Science in Taxation. She can be reached at (951) 514-2652 or visit www.estherphahlacpa.com.