By Sharon S. Heinz, Enrolled Agent
Profit Wise Accounting Tax and Marketing
Americans are facing a long list of tax changes for the 2021 tax year. Smart taxpayers will start planning for them now. 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, which was enacted in March 2021, provides a dramatic, one-year expansion of the child tax credit for the 2021 tax year. The 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. If the credit amount exceeds the total monthly payments, you can claim the excess credit on your return. But if the credit amount is less than the payments, you may or may not have to pay the excess back.
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. For people filing their tax return as a single person, the extra amount starts to phase-out if their adjusted gross income is above $75,000. The phase-out begins at $112,500 for head-of-household filers and $150,000 for married couples filing a joint return.
Recipients of the Child Tax Credit may add up their advanced credits by comparing bank statements to IRS records in the Child Tax Credit Update Portal. Recipients may also receive a letter in January summarizing payments.
Child and dependent care credit
For 2021, the child and dependent care credit is fully refundable. The maximum credit percentage also jumps to 35% to 50%. More of your care expenses are available for the credit, too. For 2021, the credit is allowed for up to $8,000 in expenses for one child/disabled person and $16,000 for more than one.
Charitable deductions
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.
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Another change for 2021 is the return of required minimum distributions — amounts that must be withdrawn from most retirement accounts by a certain age — after being waived in 2020.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 take your distribution before Dec. 31. If you do not, the penalties are pretty severe. The penalty is 50% of the amount you are required to take.
For example, if someone needed to take out $50,000 and skipped the distribution, they would owe a penalty of $25,000.
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