As tax season approaches there are a few key beneficial tax breaks to be aware of as you gather your documents to prepare your 2021 tax return.
More generous child and dependent care tax credit
For taxpayers who are working, looking for work, or attending school while paying for the care of a child under 13 or another family member who is not mentally or physically able to care for themselves, you may benefit from the temporary increases made to the child and dependent care credit. The credit is calculated based on your income and a percentage of expenses that you incur for the care of qualifying persons which this year is 50%, up from 35% in the years prior, although that percentage is reduced for those making more than $125,000. Taxpayers with an adjusted gross income over $438,000 are not eligible for this credit even though they may have previously been able to claim this credit. Qualifying expenses are minus any employer-provided dependent care benefits (e.g. money put into a tax-advantaged flexible spending account).
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A temporary expansion of the child tax credit
The maximum value of the child tax credit is temporarily $3,000 per child, ages 6 through 17, and $3,600 per child, ages 5 and under. Unlike prior years, the credit is fully refundable for 2021, meaning you can get the maximum amount of the credit even if it exceeds your federal tax liability for the year.
For the first time, the IRS made advance monthly payments on that credit from July 2021– December 2021 so half of the total credit amount was paid in advance so you will claim the other half when you file your 2021 income tax return. To help with that calculation, the IRS will send you a letter (Letter 6419) detailing the amount that you have already received. The amount may be different than you expected for various reasons:
- The advanced payments were calculated based on your 2020 or 2019 income and family situation. But the final calculation will be based on your 2021 information, which may change how much you are eligible for i.e. you had another child in 2021.
- Or you may have gotten paid too much if, for example, you’re divorced or changed which parent could claim a child on their tax return or if your income increased or your child turned 18. Whether you must “repay” the excess you got depends on your income.
Those making less than $40,000 ($60,000 if married) get full repayment protection. But if you are making more than $80,000 ($120,00 if married) you may have to repay.
Claim a recovery rebate credit
Since the pandemic began, the IRS has sent out three rounds of Economic Impact Payments (stimulus checks) to eligible Americans, the last of which went out in 2021.
If you got that third payment, the IRS will send you a letter (Letter 6475) detailing how much you were paid. You will need the information from the letter to complete your tax return, so make sure you put it with your tax documents when you receive.
If you did not get the third payment—or perhaps now qualify for more than you were paid because your income or family situation changed—you should review whether to claim the refundable rebate credit.
“Individuals who did not qualify for a third Economic Impact Payment or got less than the full amount may be eligible to claim the 2021 recovery rebate credit based on their 2021 tax year information,” the IRS noted.
If your 2021 income would disqualify you from receiving the third stimulus check that you received, you do not need to repay it since it was based on your 2019 or 2020 income.
Even if you do not itemize, the IRS is allowing those who take the standard deduction to deduct up to $300 in cash to qualifying charities (married couples filing jointly may deduct up to $600).
Should you have any questions or need more information, please do not hesitate to contact us at 407-412-9299 or info@felsingcpa.com.
Source: IRS; CNN Newsource January 14, 2022