2021 Tax Laws

By Alice Horton- Barr, CEO, Honest Abe's Taxes, Inc.

Some very interesting credits and expenses that will require good documentation and sometimes a need to file when you have not in the past are in play for the tax year 2021. Business Filings began on January 7 and Personal Filing, with W-2’s, began on January 24.

As in recent years, if your refund includes Earned Income Tax Credit and Child Tax Credit the refund will come no sooner that mid-February. For many people in the last few years Head of Household status and stimulus recapture has also delayed refunds, sometimes for months. For taxpayers without obligations that would “take their refund” being concerned about the delay they can elect to file with a “Bank Product” so that they can potentially get an advance. The fees for filing this way are paid to a “third party”, the Bank, not your tax preparer.

Filing will be required this year for many people who regularly do not need to file due to their income level, or lack of income. Stimulus payments, early Child tax Credit payments, a birth of a child, and dependent care expenses may give refunds or balance dues that taxpayers will not expect. If you fail to file a 2021 return, assuming you do not need to, you could find yourself receiving a letter from the IRS within three years that they require a return, and odds are you will not still have your records. Best advice, take your documents to a qualified preparer to see “if you need to file”; make sure that preparer is capable of doing a “look over” for a nominal fee, not full charge, to determine, yes or no, and what their full fee would be.

Let’s start with early Child tax Credit payments, these were issued based on tax returns and if a dependent child received Social Security Benefits due to the parents. These credits were not a bonus, they were early credits sent to help the cash flow of income. The credits may not be qualified though unless the parents had earned income and/or their income is so high that the credit “phases out”. If you are not eligible or have too much income, you may have to pay back that early dollars received. You will be receiving a letter from the IRS about the early money, keep it and bring it in to you tax preparer.

Tax Customer “John & Sue”, given various scenarios:

Facts: Mom and Dad, on SSI and SSDI, two children who have SS benefits due to the parents, they received $3,000 early credit refund.

Scenario A: Neither parent had any earned income and therefore the early refund received must be paid back. (Owe $3,000)

Scenario B: Mom and Dad had a part time job in addition to the SS; they now do not owe the early refund back, they get the balance of the Child Tax Credit and may be eligible for Earned Income Credit. (up to Refund of $5,515)

Tax Customer “Jane”, does not receive SSI or SSDI, has zero income and has a baby in 2021

Scenario A: This taxpayer is eligible for $5,000 - why? $3,600 Child Tax Credit plus $1,400 Stimulus payment and qualifies for the refundable credits because they have no "passive" (SSI and SSDI) income.

Scenario B: The taxpayer has no passive income except Unemployment they are still eligible for the $5,000 and

Scenario C: The taxpayer had some W2 income from a job, the taxpayer receives the $5,000 plus possibly earned income credit.

Stimulus payments, the $1,400 thrid payment - the IRS is sending out letters telling you how much you received. If you received too much at this time they are not requiring you to pay it back, same as in 2021 for the 2020 payments.

If you did not receive your third payment or if you did not receive the $1,400 for all of your qualified taxpayers and dependents you need to file a return to get the additional dollars due you, same as last year to "reconcile" the stimulus payments.

Child Care Dependent Expenses - in the past these expenses were limited in several ways: the age, the amount paid, both parents had to have income and then a % (based on the earnings of the parent(s) of the amount paid was given as a non-refundable credit against tax liability.

Current tax law has the Child Care Dependent Expense Credit as being fully refundable. It has increase the allowed payments for child care to $8,000 for one child and $16,000 for two or more children. The "credit" refunds up to 50% of the child care expenses that you paid out of pocket unless your income "phases out" the credit (greater than $125,000)

Taxpayers claiming this credit should protect themselves, and a good tax preparer will ask for, proof of the amount paid, to who it was paid, the provider's address, phone number, federal EIO or SSN and signed.

Meals - for many years meals have been 50% deductible for businesses, 80% for truck drives (usually on perdiem). For 2021 and 2022 meals spent for legitimate business purposes at a restaurant will be 100% deductible (again, your best interest, have proof!!!) Coffee shops and deli expenses are only 50% deductible, they are not considered a "restaurant".

Entertainment expenses are not deductible!

2020 401k withdraws income delayed. If a taxpayer withdrew up to $100,000 for early distribution in 2020, they had zero 10% early withdrawl penalty and had the option of paying the income tax over three years or all in 2020, or paying back that withdrawl and paying zero income tax. if you go to your "repeat preparer" your records are in the system and should be handled properly. The payback date is 33 1/3% on the anniversary date of the withdraw(s), you can later amend your taxes and get a refund on the tax dollars you paid that were not due.

Lifetime Learning Credit... Once a taxpayer has qualified and used the 4 years of AOTC (American Opportunity Tax Credit), refundable and non-refundable portions, the Lifetime Learning Credit will give some non-refundable credit to the taxpayer if their income is less than $69,000 or $138,000 for MFJ. The credit is 20% of the first $10,000 qualified education expense, with a maximum of $2,000 per return. The credit phases out for income between $59,000 and $69,000 (single) or $118,000 and $138,000 (MFJ).

Health insurance through the MarketPlace - as in years past this must be "reconciled". For the tax year 2020 the ACA penalty, or payback of too much reduced insurance was waved.It appears that was a one year grace and for the filing 2021 if your income was greater than the estimate you gave healthcare.gov, you may be facing a "penalty". If your income was less, then as in the past, you are eligible for additional credit or a refund"

Many tax laws and credits are still not "settled" and some tax forms are still "not finalized or approved" due to the fact laws are not settled, so you can see that it is probably in your best interest with all these changes to use a professional preparer to file 2021 taxes.

Honest Abe's Taxes has move to larger offices, with more staff and welcomes serving your tax needs. We are now in Hometown on Route 309, just pas Walmart, 259 Claremot Avenue, phone number 570-668-8297. Call for your appointment today.