Another year of dealing with the coronavirus has resulted in major modifications to the tax season for 2021.
While year-end tax preparation is always crucial, recent changes — and the likelihood of more in the future — may provide distinct benefits while also posing risks.
According to financial experts, these are some of the most significant changes for individual taxpayers and how to prepare.
Child tax credit (expanded)
For 2021, the American Rescue Plan increased the child tax credit to $3,000 for families with children aged 17 and under, with an additional $600 for children under the age of six.
Experts believe that while millions of Americans have gotten advance credits, filers who earned more than expected may be required to repay some of it.
Single filers must have a modified adjusted gross income of less than $75,000, and married couples filing jointly must earn less than $150,000 to be eligible for the full credit.
Certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina, advises filers to be organized by balancing their payments.
The Child Tax Credit Update Portal allows recipients to calculate advanced credits by comparing bank statements to IRS information. In January, they may get a letter outlining their payments.
After that, filers might try to estimate their 2021 adjusted gross income to check if the payments they received are still valid.
If there are any missing credits, Harris recommends starting the filing process as soon as possible, as many taxpayers had 2020 refund delays due to stimulus payments.
“Get your return filed as quickly as possible,” he said. “That will at least get the wheels turning on what could possibly be another slow year for IRS processing.”
Deductions for charitable contributions
Even if they don’t itemize deductions on their federal tax return, taxpayers who want to make a year-end charitable donation can take advantage of an unique write-off for cash gifts in 2021.
It’s been tough to take the charity deduction since most Americans don’t have enough itemized deductions to surpass the standard deduction, according to Harris, but the 2021 extension may provide a “good tax advantage” for non-itemizers.
Premiums for health insurance
In March, Congress boosted premium subsidies for health insurance, making coverage more affordable for millions more Americans.
While the exchange has temporarily set premiums at 8.5 percent of family income, filers may be required to refund some benefits if their incomes surpass the 2021 levels.
“It can really be a very unpleasant and stressful situation for those folks that have to pay money back,” said Harris.
Minimum distributions are required
The reintroduction of required minimum distributions (amounts that must be withdrawn from most retirement plans by a particular age) after being waived in 2020 is another change for 2021.
“You need to get it out before Dec. 31 and if you don’t, the penalties are pretty severe,” Harris said, with someone owing levies of 50% of the amount they needed to take.
For example, if someone required $50,000 and skipped the distribution, he claimed they would owe a $25,000 penalty.
The guidelines, including ages, deadlines, and requirements by plan, are covered by the IRS here.