Let’s face it, folks—2021 (okay, 2020 too) came and went in what feels like a blink of an eye. It’s hard to even keep track of everything that has happened in the past year. We rang in the new year not with a bang but in the comfort and safety of our homes with loved ones. We bore witness to a political year and events that historians are sure to be talking about for decades to come. And ultimately, we all started to adjust and slowly ease back into everyday life as we got more comfortable with our new, not-so-post-pandemic reality.
As we reflect on everything we experienced, grieved, and accomplished over the past year, we want to take a moment to recognize each and every one of you. This year has been hard, and we commend you for your hard work. The work of a financial planner/advisor has been so impactful and helped individuals across the US navigate this pandemic, and that is such an important accomplishment to recognize. Thank you from all of us at XYTS (and XYPN) for everything you do.
In addition to realizing just how awesome you all are, the tax team also wants to take the time to highlight some of the major tax-related events that took place during 2021. Events that you and your clients will want to keep top of mind as we enter the new tax season and start to prepare and file their 2021 tax returns.
Economic Impact Payment #3
The American Rescue Plan was signed into law in March 2021 in an effort to provide individuals and families with immediate and much-needed financial assistance. The plan includes a third Economic Impact Payment (EIP) in the amount of $1,400 that was issued to eligible individuals ($2,800 to married couples), plus an additional $1,400 for each dependent in 2021. Due to new income limitations, some individuals may not have been eligible for the third payment even if they received the first and/or second EIP or claimed a 2020 Recovery Rebate Credit.
In general, here are the criteria for an individual to be eligible for the entire $1,400 amount:
- they are a U.S. citizen or U.S. resident alien (and their spouse if filing a joint return), and
- they are not a dependent of another taxpayer, and
- their adjusted gross income (AGI) is not more than:
- $150,000 if married and filing a joint return or if filing as a qualifying widow or widower
- $112,500 if filing as head of household or
- $75,000 for eligible individuals using any other filing status
When AGI exceeds the amounts above, the $1,400 EIP is reduced. The EIP is completely phased out when an individual’s AGI is at or above the amounts below:
- $160,000 if married and filing a joint return or if filing as a qualifying widow or widower
- $120,000 if filing as head of household
- $80,000 for eligible individuals using any other filing status
These payments started going out in March 2021 and were paid up through December. If your client received the third economic stimulus check, they should have also received an IRS Notice 1444-C in the mail, which described the payment and is crucial for them to keep as they start to prepare their 2021 tax returns.
Why is this notice so important? Because the stimulus payment went out during the 2021 tax season when some individuals may not have filed their 2020 tax returns, the IRS used their 2019 tax returns to determine eligibility for the third payment. However, that means that the IRS wasn’t able to consider whether your clients made less money in 2020 or if they had a new baby or gained another dependent. Ultimately, to determine whether or not your clients qualify for more, they will need to keep this notice so they know how much they received when they’re preparing their tax returns.
Luckily, all hope is not lost if they lost their notice or didn’t receive it. If your clients don’t know the exact amount that they received, they could look up the details of the payment here and grab the amount.
Additionally, if you want to calculate how much you qualify for, check out this online calculator from Kiplinger.
Changes to the Child Tax Credit
The Child Tax Credit (CTC) amount and scope both expanded, the credit is fully refundable, advance payments are an option, and it has extended to Puerto Rico and the U.S. Territories. Prior to the American Rescue Plan, the Child Tax Credit was $2,000 per child under the age of 17. The American Rescue Act increased the CTC from $2,000 per child to $3,000 per child for children over the age of six and raised the age from 16 to 17. For children under the age of six, the CTC was raised from $2,000 to $3,600. The credit is fully refundable, with half of the credit being issued through optional, advanced monthly payments starting in July and continuing through December. The other 50% of the credit is claimed on the 2021 tax return, with the entire credit being reconciled on the 2021 tax return. These changes are only applicable for the 2021 tax year.
Also, if your clients received an advance Child Tax Credit in 2021, then this is also important for your clients as they prepare their tax returns. They should be receiving Letter 6419 in the mail from the IRS in January 2022 that will indicate the total amount of the advance Child Tax Credit payments that were disbursed to them during 2021. They could also visit this IRS website to look up the details of the payments they received.
Earned income credit
For the 2021 tax year, the American Rescue Plan Act temporarily expanded the earned income credit (EIC) eligibility along with the maximum credit allowed for individuals without children. The minimum age to claim the (EIC) for taxpayers without children is reduced from age 25 to age 19 (except full-time students). The maximum age limit of 65 for claiming the childless EIC has been eliminated. Taxpayers may use their earned income from the 2019 tax year to determine their EIC for the 2021 tax year if the 2021 earned income was less than the 2019 earned income. The disqualified investment income limit also increases from $3,650 (2020) to $10,000.
Dependent care assistance
For 2021 only, the child and dependent care credit is fully refundable, and the dollar limit for eligible expenses increases significantly from $3,000 to $8,000 for one eligible child and from $6,000 to $16,000 for two or more eligible children. The maximum credit rate increased from 35% to 50%, and the AGI limitation increased from $15,000 to $125,000. Taxpayers with an AGI of $125,000 to $400,000 will receive a partial credit. The exclusion for employer-provided dependent care assistance increases from $5,000 to $10,500 ($5,250 for MFS).
Student loan forgiveness modifications
The American Rescue Plan provides a special rule for discharges in 2021 through 2025 that the discharge of student loans as cancellation of debt is not included in gross income. Student loan borrowers who made qualified student loan payments after March 13 could have those payments refunded if they notify their loan servicer. The relief has been extended several times with the final extension set to end on January 31, 2022. However, on December 22, 2021, an additional extension of student loan relief was extended to May 1, 2022.
Increased charitable deduction for joint filers who take the standard deduction
A small (but important!) tip: For 2020, joint filers were able to take up to a $300 charitable deduction on their 1040 even if they only took the standard deduction. For 2021, that amount has increased to $600 total for joint filers.
Proposed legislation: Build Back Better Act
On November 21, 2021, the House of Representatives passed their version of the Build Back Better Act with some proposed tax changes. Find the details here.
On December 11, 2021, the Senate Finance Committee released their portion of the Build Back Better Act containing some tax provisions. Find the details here.
Some proposed tax changes include:
- Expanding 3.8% net investment income tax to S-Corp and other pass-through profits for higher-income earners.
- Changes to Section 1202 (Qualified Small Business Stock)
- Tax surcharge on ultra-high-income individuals ($10m+)
- Increasing state and local tax deduction (SALT) from $10K to $80K (proposed by House, but not by Senate yet)
As of publishing this on January 10, 2022, the same bill has not been passed by both the House and Senate and signed by the President, yet. Therefore, no official tax law reform has taken place yet until something is signed into law. However, you can trust that we here at XYTS are monitoring the advancement of this legislation and will continue to monitor this into this new year.
Again, those are just some highlights from a few of the provisions within the COVID-19 relief bills that you and your clients need to be mindful of going into the tax season. While that in and of itself is a lot to manage and keep track of, XYTS has provided a couple of guides for you, as an advisor, to help your clients navigate these tax laws:
- The Ultimate 2021 Guide to Year-End Tax Planning as an Advisor
- Your Guide to Tax Preparation and Tax Planning as an Advisor
- Year-End Tax Planning with Director of Tax, Sam Nguyen, CFP®, EA
To wrap up, the world of tax has grown more complex this past year, so it’s no surprise that with these changes may come a long line of questions from your clients that you may need to field. Just remember, amidst all of the chaos that surrounds taxes, when you work with XY Tax Solutions, you will always have tax experts in your corner to help you navigate your clients’ unique situations and the challenges that have unfolded. Learn more about XYTS services and how to outsource your tax preparation here.
All in all, you’re a rockstar—great job navigating 2021, and fingers crossed for a stellar 2022!
About the Authors
As the Operations Manager for XY Tax Solutions (XYTS), Sara analyzes business operations and identifies client needs to bring the two closer together. She manages the flow of the workplace and optimizes day-to-day activities.
Cassie Jackson is Operations Specialist on Team XY Tax Solutions. She can't get enough of working alongside her XYTS teammates towards a common goal and holistically approaching tax processes. When she's not tackling taxes, Cassie loves to get crafty and active, taking on home decorating projects and going hiking. And she has some great company—her two dogs Poof, a toy Aussie, and Remi, a mini Aussie.
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