2021 Federal Tax Changes
With the 2021 tax season just around the corner, it’s time to discuss some important changes to federal tax laws that might affect your 2021 tax returns. Enacted this year, the American Rescue Plan Act (ARPA) and the Consolidated Appropriations Act (CAA) have brought about several updates to topics such as the Child and Dependent Care Credit, Education Tax Credits, Investment Tax Credit, and Expired Tax Benefits including Unemployment Benefits and the Premium Tax Credit.
Family and Education
The ARPA amended the Child and Dependent Care Credit by increasing the top credit percentage of qualifying work-related expenses from 35% to 50% and substantially increasing the AGI limit at which phase-out begins, from $15,000 to $125,000. Additionally, eligible families will now be able to claim qualifying expenses of up to $8,000 for one child or dependent and $16,000 for two or more. That being said, the maximum credit for one dependent’s qualifying care expenses is $4,000 and $8,000 for two or more. Due to this change, more of you might qualify for the credit, but if your AGI is between $125,001 and $183,000, then your credit percentage is phased out to 20% and remains at 20% for families with an AGI of $400,000. The credit for qualifying families with an AGI above $400,001 is phased out to 0% and ceases at $438,000. Lastly, the credit is now fully refundable.
Good news for those that qualify for education credits! The CAA modified the Lifetime Learning Credit phase out range so more of you may qualify for it this year if you did not last year. The phase out range of MAGI for the Lifetime Learning Credit is now between $80,001 and $90,000 for single taxpayers and between $160,001 and $180,000 for married filing joint taxpayers (the same phase out range as for the American Opportunity Tax). Additionally, the CAA allows a credit of up to $2,500 per student each year. This credit is not a refundable credit, but it will reduce your income tax.
Solar Panel Credit
As you may know, the Investment Tax Credit (ITC) has been of great benefit to the solar industry, and has now been extended for two additional years! You can claim up to a 26% tax credit in 2021 on the costs related to installing solar systems on residential or commercial properties, but only if you install them by December 31st, 2021. Now is probably one of the last chances to act and have them installed in time if you want to take advantage of the credit.
Expired Tax Benefits
It’s important to discuss tax benefits that were put in place for your 2020 tax return but will not be carried forward to your 2021 returns. One of such includes Unemployment Benefits; last year, you were able to exclude up to $10,200 of your unemployment benefits from your taxable income. This year, however, any unemployment benefits you receive will be fully taxable.
Lastly, if you bought insurance through the Health Insurance Marketplace in 2020, you did not have to pay back any excess advance payments of the Premium Tax Credit. However, for 2021, that is no longer the case and you will have to repay advance payments that exceed the credit amount in 2021 if your income is 400% or more of the federal poverty limit.
Tips for Upcoming Tax Season!
1. Take advantage of the Work Opportunity Tax Credit. If you’re hiring someone from a targeted group, such as a qualified veteran, ex-felon, or summer youth employee, you may be eligible for an income tax credit of up to $9,600! Use this chart to see if the employee you plan to hire qualifies for the credit. Reach out to us to learn how to apply for and calculate the credit for each eligible employee. It will be available until 2025!
2. If you plan on itemizing your tax deductions for 2021, remember that your cash contributions to public charities or private foundations may be deductible up to 100% of your AGI, subject to other limitations. If you’re not itemizing your deductions, you may deduct up to $300 of your charitable contributions ($600 for married filing jointly). However, be aware that Congress increased the penalty from 20% to 50% on an underpayment of tax if you deducted charitable contributions and didn’t actually make any!
3. Due to a number of changes to the CARES Act at the end of 2020, you should be mindful of the Employee Retention Credit. If your business was fully or partially suspended because of COVID-19, or you had a decline in revenues, you may be eligible to claim a tax credit equal to 70% of qualified wages you pay to your employees, limited to $10,000 per quarter. The maximum ERC you can claim per employee is $28,000 in 2021. Read Notice 2021-23 and Notice 2021-49 for more info on the credit and if it applies to you.
Contact us!
We are here to help you adjust to these changes and plan accordingly, so don’t hesitate to contact the professionals at Abbott and Company.