Listed here are must-know modifications for the 2021 tax season
Another year of dealing with the coronavirus has led to significant tax changes for the 2021 season.
While year-end tax planning is always important, recent adjustments – and the ability to have more in sight – can offer unique benefits, as well as potential pitfalls.
Here are some of the biggest changes for individual taxpayers and how to prepare, according to financial experts.
Extended child tax credit
The American Rescue Plan has increased the child tax credit for families with children under 17 to $ 3,000 in 2021, with an additional $ 600 for children under 6.
While millions of Americans have received prepayment, applicants who have earned more than expected may have to repay some of it, experts say.
To qualify for full credit, single parents must have a modified adjusted gross income of less than $ 75,000, and married couples filing together must earn less than $ 150,000.
Applicants should organize themselves by matching their payments, said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina.
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Recipients can calculate early credits by comparing bank statements with IRS records on the Child Tax Credit Update Portal. And they can get a letter in January summarizing the payments.
After that, applicants can attempt to estimate gross adjusted earnings for 2021 to see if they are still eligible for the payments received.
However, if there is a lack of credit, Harris suggests starting the filing process early, as many taxpayers experienced delays in refunds in 2020 related to stimulus payments.
“Get your return in as soon as possible,” he said. “That will at least set the wheels in motion, which could potentially be another slow year for IRS processing.”
Deductions for charitable purposes
Taxpayers who aim to make a charitable donation at the end of the year can claim a special write-off for monetary gifts in 2021, even if they do not list any deductions in their federal tax return.
For 2021, single parents can claim a tax break on monetary donations up to $ 300, and married couples can get up to $ 600, according to the IRS, an expanded coronavirus relief measure starting in 2020.
Since most Americans don’t have enough itemized write-offs to exceed the standard withholding, it was difficult to get the charity deduction, Harris explained, but the 2021 extension could provide a “nice tax break” for non-itemization.
Health insurance premiums
Congress also increased health insurance premium grants in March, making insurance more affordable for millions of Americans.
While the exchange has temporarily capped rewards at 8.5% of household income, applicants may have to repay some of the benefits if income exceeds the 2021 thresholds.
“It can really be a very uncomfortable and stressful situation for those who have to pay back their money,” said Harris.
Similar to the child tax credit, applicants could now extrapolate income for 2021 to try to estimate liability and set aside money for a future bill, he suggested.
Required minimum distributions
Another change for 2021 is the return of required minimum distributions – amounts that must be withdrawn from most retirement accounts by a certain age – after being waived in 2020.
“You have to get it out before December 31st and if you don’t the penalties are pretty harsh,” Harris said.
For example, if someone had to withdraw $ 50,000 and skip the distribution, they would have to pay a fine of $ 25,000, he said.
The IRS covers the rules, including age, deadlines, and schedule requirements here.