Here are must-know changes for the 2021 tax season
- Another year of grappling with coronavirus has led to significant tax law changes for the 2021 season.
- Certain filers may qualify for the enhanced child tax credit, widened charitable deductions, health insurance subsidies and more.
- However, there are strict income limits for some benefits, and older taxpayers must restart required distributions from retirement accounts.
Another year of grappling with coronavirus has led to significant tax law changes for the 2021 season.
While year-end tax planning is always important, recent adjustments — and the possibility of more on the horizon — may offer unique benefits along with potential pitfalls.
Here are some of the biggest changes for individual taxpayers and how to prepare, according to financial experts.
Expanded child tax credit
The American Rescue Plan boosted the child tax credit to $3,000 for families with kids 17 and under for 2021, with an extra $600 for children under age 6.
While millions of Americans have received advanced credits, filers who earned more than expected may need to pay some of it back, experts say.
To qualify for the full credit, single filers need a modified adjusted gross income of less than $75,000 and married couples filing together must earn under $150,000.
Filers should get organized by reconciling their payments, said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina.
More from Advisor Insight:
Here's a look at other stories impacting the financial advisor business.
- Workers to get better idea of 401(k) retirement income
- Here are key financial considerations if you are remarrying
- Gender gap in pensions is real and needs to be fixed
Recipients may tally advanced credits by comparing bank statements to IRS records in the Child Tax Credit Update Portal. And they may receive a letter in January summarizing payments.
After that, filers can try to estimate 2021 adjusted gross income to see if they still qualify for the payments they received.
However, if there are missing credits, Harris suggests starting the filing process early as many taxpayers had 2020 refund delays related to stimulus payments.
"Get your return filed as quickly as possible," he said. "That will at least get the wheels turning on what could possibly be another slow year for IRS processing."
Taxpayers eyeing a year-end charitable donation may take advantage of a special write-off for cash gifts in 2021, even if they don't itemize deductions on their federal tax return.
For 2021, single filers may claim a tax break for cash donations up to $300 and married couples may get up to $600, according to the IRS, an extended coronavirus relief measure from 2020.
Since most Americans don't have enough itemized write-offs to exceed the standard deduction, it's been difficult to claim the charitable deduction, Harris explained, but the 2021 extension may offer a "nice tax break" for non-itemizers.
Health insurance premiums
Congress also increased health insurance premium subsidies in March, making coverage more affordable for millions of Americans.
While the exchange has temporarily capped premiums at 8.5% of household income, filers may have to repay some of the benefits if earnings exceed the thresholds for 2021.
"It can really be a very unpleasant and stressful situation for those folks that have to pay money back," said Harris.
Similar to the child tax credit, filers may project 2021 income now to try and 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 need to get it out before Dec. 31 and if you don't, the penalties are pretty severe," Harris said, with someone owing levies of 50% of the amount they needed to take.
For example, if someone needed to take out $50,000 and skipped the distribution, they would owe a penalty of $25,000, he said.
The IRS covers the rules, including ages, deadlines and requirements by plan here.
Source: Read Full Article