The Child Credit has increased significantly for 2021 with great changes to the allowed adjusted gross income. Many have received a prepayment of the credit available to families. Note that if your income for 2021 has changed from 2020, you may have received the prepayment in error and you will have to pay back the overpayment with the filing of your tax return. The original child tax credit of $2000 is still in effect with a higher AGI available. The additional credit of $1600 for those under 6 and $1000 for those under 18 has a lower AGI limitation. All of this will need to be calculated with the tax filing. The information needed to complete this will be letter #6419 you will be receiving in January showing what prepayment you have actually received. Please hang on to that!
Dependent care has greatly changed for 2021. You can now utilize $8000 of dependent care fees per child vs $3000 in 2020. At $125,000 in adjusted income, the credit of 50% (Max of $4000 per child) does start to phase out, but we do want to try and get as much of that credit as we can – in 2021 it is now refundable! We do need childcare receipts that include the name, address, and federal ID (Social security if an at home provider) and amount paid for the year. Preschool counts for any child attending.
In the Spring of 2021, many received $1400 per family member as a 3rd stimulus or recovery rebate. Everyone received a notice from the IRS of the amount that was being mailed or direct deposited. This letter #1444-C is very important. If you did not save it, please print out the exact amounts of the deposits from your account where the funds were received. Tax filing without this will cause delays along with rejections and penalties if repayment is required.
Along with more programs and revenue streams available to taxpayers in 2021, the IRS is increasing their watch. Virtual currency is a top audit desire of the IRS. IF you have done any trading of Crypto currency, it needs to be reported. Using a software such as “cryptotrader.tax” allows for your cost basis to be tracked. If you have tracked your original purchases of the currency, we simply need the units and cost of each type of coin per date corresponding to the sales reported to the IRS. Not reporting to the IRS is really no longer an option.
College students are still eligible for the American opportunity credit during the first 4 years of schooling. After that the Lifetime learning credit is available. These credits are for the cost of Tuition, fees, books, and classroom expenses only – no room and board fees are allowed to be used to receive the potential $2500 credit with $1000 of it being able to be refunded. Note that using any 529 plans for room, board, and additional college expenses is available. We need the 1098T from the college to apply for the credit as well as receipts of any additional costs associated with your child’s education. The 1098T is found on your students’ school email/website.
The Earned Income Credit has widely expanded to include homeless or former foster children under the age of 24 years of age. This will really be available to the Graduate student that has completed school and started a very underpaid position due to the unavailability of professional hiring in 2021. The taxpayer can not be included as a dependent on any other return and must be considered self-sufficient.
Investment accounts with interest, dividends, capital gains, or stock trades must be reported. For 2021 the legislature did not change the capital gain rules leaving us with a favorable 0%, 15%, and 20% tax on long term investments. 1099B forms will be necessary to record sales of funds. When restricted employee stock options are sold, the brokerage firm will usually have addendum information to use for tracking the cost basis. The cost will not be included with the 1099B which leads the IRS to believe you have a large capital gain. The additional information is needed by us to properly report the lesser gain.
The Premium tax credit allowed for healthcare has been expanded to allow those who have received unemployment compensation or who have income less then 400% of the poverty level to receive health care credits.
For those of you that took a distribution from a retirement plan due to Covid in 2020 and elected to spread the income over 3 years, form 8915F will be filed with your return to include the 1/3 of taxable funds for 2021. If you have opted to repay the funds back to the retirement plan, we will report that on your 2021 return and amend your 2020 return to recoup the taxes paid in the prior year.
Owners S-corporations or partnerships that report earnings on a K-1 for 2021, must have a basis schedule in order to file their personal tax return. The IRS has mandated equity basis be reported when filing a personal tax return. Any distributions that are over the equity limitations will be taxed as capital gains distributions.
Due to the widespread fraudulently filed tax returns, the IRS has allowed everyone to be eligible to receive an identity protection PIN#. This is a 6-digit number that prevents someone else from filing a tax return using your social security number. Go to IRS.gov to use the IP PIN tool to properly validate your identity and receive a PIN#. Creating an online account with the IRS is done through ID.me. This login will allow you to review any stimulus or child credits that have been paid to you. Creating the account requires a valid ID and various historical questions to validate your identity. It is a bit time consuming but does allow for great information and security protection.
Tina Davies CPA PC