2021 tax law changes

Economic Impact Payments (Stimulus checks)

Last year, one of the biggest questions we asked was “Did you receive your stimulus payment, and if so how much?”. The stimulus payment you received was NOT taxable income, but if you did not receive the full amount (or missed out entirely) based on your 2020 income, the missed stimulus was added as a “tax credit”.  This generated a lot of confusion, as some claimed they did NOT receive a stimulus payment… when they actually HAD received it.  The IRS followed up the errors with letters that they reduced your income, or you owed the extra amount back.

This issue will be repeated again for the 2021 tax year, concerning the “round 3” stimulus payments of $1,400 per dependent. Most will have received the round 3 stimulus payment in March or April of 2021, either by check or direct deposit.

Advanced Child Tax Credit

In 2021 parents that qualify for the child tax credit on their forms, were given the opportunity to take this credit in advance instead of having the credit added to their refund when filing next spring.  In January the IRS will be sending a letter to all those who took this option, to inform you of the total advance credits you received (IRS letter 6419). You may need to refer to this letter when you file your 2021 tax return during the 2022 tax filing season.

It is important to know that unlike the stimulus, the ACTC is not considered “free money” but is an advance of the refund you might normally expect when filing your forms each spring.

Charitable contributions:

Charitable contributions are still fully deductible if you itemize your deductions.  However with the new higher Standard Deduction ($12,400 per individual) it is difficult to itemize.

However for the 2020 tax year, you can claim up to $300 in charitable gifts “above-the-line”.  Basically the charitable gift is taken directly off of your Adjusted Gross Income (AGI) whether you itemize OR take the standard deduction.

Retirement accounts:

The CARES act removed the age limit to make contributions to an IRA.  What used to be capped at 70 1/2 years, is now unlimited.  BUT you must have “earned” income to be able to deduct the contribution from your taxable income.

Prior to 2020, you needed to begin taking required minimum distributions (RMDs) from their plans when you turned 70½ years old.  Under the SECURE Act and for distributions required to be made after Dec. 31, 2019, the age at which individuals must start taking distributions from these retirement plans has been increased from 70½ to 72. The RMD rules try to get taxpayers to spend retirement savings during their lifetimes instead of transferring wealth to beneficiaries.  A side benefit to the age thresh-hold change, was that you could choose NOT to take a required distribution in 2020.

If you took an early withdrawal from a retirement account (IRA or 401k) in 2020 due to being financially impacted by the corona virus pandemic, you could take a distribution up to $100,000 and not be subjected to the 10% early withdrawal penalty. You could choose to distribute the taxable income calculation over a 3-year period, or you could also contribute the money back to your retirement plan within three years and treat the transaction as a direct rollover.

Alimony:

For divorces that were finalized after December 31st 2018, alimony is no longer deductible for the payer and included as income for the recipient. If you divorce was finalized prior to this date, spouses can still take advantage of the changes, but you should obtain legal advice as it will requre changes to your divorce agreement.

Tax changes for the self employed:

PPP loans – Most of our client are small businesses, and if you received less than $50,000 in PPP loans you can use the simplified form found here: PPP Loan Forgiveness Application Form 3508S (sba.gov)  It is basically 1-page, and documentation is NOT required.  However you might have to prove your position if you are ever audited, so still keep good records.

New 1099 NEC forms – The old 1099-misc forms have been re-vamped to separate out the money earned as a sub-contractor or sole proprietor.  If you have self-employed income, you will now receive a 1099-NEC (non-employee compensation).  The 1099-misc still exists, but the self-employed section has been pulled out and given its own form,