With tax season rapidly approaching, individual tax planning should also begin. Due to several legislative changes to address economic hardships caused by COVID-19, there are a few items to consider while planning for 2021 taxes.
Advanced Child Tax Credit
The American Rescue Plan Act significantly increased credits from $2,000 to $3,000 for children under the age of 17 and from $2,000 to $3,600 for children under the age of 6. The enhanced credit phases-out for individuals with AGI over $75,000 and over $150,000 for joint filers. Typically, these credits are claimed on Form 1040 but beginning in July of 2021, the government started paying these monthly as an advanced payment. Taxpayers were able to opt-out of the advanced payments but the process was not straightforward and most taxpayers did not. The IRS will mail taxpayers Letter 6419 showing the amounts taxpayers received during 2021 and this letter will be used to determine if the credit was over paid or under paid on the Form 1040. Please keep the IRS Letter and submit with your other tax documents.
2021 Recovery Rebate Tax Credit
One more round of direct payments also known as “stimulus checks” were issued to individuals based on their prior year adjusted gross income. However, the correct amount of the rebate will be calculated on your 2021 tax return. If your return indicates you received a rebate larger than what you are entitled to, you do not have to repay the excess. On the other hand, if your return shows that your rebate is smaller than what you were entitled to, any additional amount will be claimed as a credit towards your tax bill for 2021. Please keep any IRS statements received and submit with your other tax documents.
Student Loan Repayment
The passage of the CARES Act provided relief measures that include:
- A suspension of loan payments until Jan. 31, 2022
- A 0% interest rate
- Stopped collections on defaulted loans
Taxpayers are still able to claim up to $2500 of qualified student loan interest payments as “above the line” deductions.
Again for 2021, if you do not itemize, you may take an “above the line” deduction for cash charitable donations. For 2020 and now for 2021, regardless of whether you itemize or take the standard deduction, taxpayers may claim a $300 tax deduction ($600 joint returns) for cash contributions to charity.
401k and SEP Contributions
Contributions to a 401(k) Plan or SEP are not only great retirement planning tools, but they also reduce taxable income. The maximum contribution to a 401(k) this year is $19,500, and if you are an employee who is 50 or older, an additional contribution of $6,500 can be made as well (“Catch-up Contribution”).
Early Retirement Plan Distribution
The CARES Act gave some relief to taxpayers that needed access to retirement funds last year. An individual under 59.5 years old, who was diagnosed with COVID-19, or was financially affected due to a shutdown/quarantine, was allowed to take up to $100,000 out of their 401k, IRA, or pension plan and defer the recognition of that income over three years (2020, 2021, and 2022) without receiving the 10% penalty for early distribution. If an election was made to defer the income recognition over three years, then one third of the 2020 retirement distribution will be included in taxable income on the 2021 tax return. Taxpayers are allowed to re-contribute the early withdrawn funds at any time over the three year recognition period to avoid paying tax on those funds.