As we continue to fight through the challenges related to COVID and life in general, it is our hope that we can reduce some of your stress as it relates to income taxes. As we all know, the tax laws are ever-changing and that has been especially true in 2020 and 2021. The following are some of 2021 tax updates that we feel are important to share with you. Please call us with specific questions or to schedule a tax consulting meeting.
2020 Standard Deduction
Standard Deduction amounts have increased from $150 to $300 depending on your filing status with an additional amount for taxpayers over 65. Although very few taxpayers itemize their deductions, we still recommend tracking all receipts since we often cannot determine if you will have enough to itemize until late in the tax year. Even if you do not itemize, if you own your own home, please provide us with the real estate taxes you paid, as they are deductible on most state tax returns.
There have been changes to charitable deductions for taxpayers that use standard deduction and/or itemize their deductions. For the former, the $300 cash deduction remains from 2020 tax year, but this amount has been increased up to $600 for those married filing jointly. If you itemize, your charitable deductions have typically been limited to 60% of your adjusted gross income. They are now fully deductible up to 100% of your adjusted gross income for 2021.
The solar credit for residential housing is decreasing annually, down from 30% in 2019. However, it remains a viable tax reduction strategy that should be researched and discussed.
Child Tax Credit
For the tax year 2020, parents of children 16 years or under received up to $2,000 if they had $2,500 of earned income, which was partially refundable. Significant changes occurred for 2021. Now the child tax credit is $3,600 for children ages 5 and under and $3,000 for children ages 6 through 17. In addition, the credit is fully refundable and the prerequisite to have $2,500 of earned income has been eliminated.
The US Treasury Department began issuing checks to families of up to one-half of the expected child tax credit from July 15 to December 15 of 2021. The balance of the child tax credit can be applied to the 2021 tax return.
The American Rescue Plan Act of 2021 provided a third stimulus for qualifying families – up to $1,400 for qualifying individuals who were not affected by the income phaseout. Although this stimulus is not considered taxable income, we will need to know the amount you received (if any). The IRS will issue letter 6475 in early 2022 verifying the amount of the stimulus paid to each family. Additionally, you can obtain this information online at IRS.gov
Unemployment benefits are fully taxable in 2021 as the exemption of $10,200 was only applicable for the 2020 tax year.
Required Minimum Distributions “RMD”
After a reprieve for the 2020 calendar year, RMD are in effect again in 2021 and going forward
As of March 11, 2021, all student loans that have been forgiven or discharged in bankruptcy will not be taxable income through 2025. If an employer assisted with the paydown of the student loans, up to $5,250 may be excluded as income, again through 2025.
Child and Dependent Care Credit
The childcare and dependent credit allows taxpayers to directly reduce their taxes by the amount spent on expenses related to child or dependent care including but not limited to babysitters, nannies, daycare and related transportation. In 2020, the maximum amount of the credit was $3,000 for one child and $6,000 for two children, and was nonrefundable. In 2021, the credit may be as high as $8,000 for one child and $16,000 for two children. The credit is fully refundable but is subject to income phaseouts starting at $125,000 through $438,000, depending on your filing status.
Lifetime Estate and Gift Tax Exemptions in 2022
The lifetime estate and gift exemption has been increased for 2022 to $12,060,000 per person. The annual gifting per person per calendar year has been increased from $15,000 in 2021 to $16,000 in 2022.
Home Office Deduction
A note of clarification: Home office deductions do not apply for the many taxpayers who have been working from home as a result of COVID. The home office deduction is only available for self-employed taxpayers.
Please reach out to us with any questions. We look forward to working with your this tax season!