There are usually some new twists and turns to the current tax return rules for individuals, but this year is especially tricky due to recent legislation. Following are six potential items to watch out for on 2021 returns.
1 Charitable donations: Normally, you can deduct monetary contributions made to qualified charitable organizations only if you itemize on your return. However, under rules that went into effect in 2018, more taxpayers are claiming the standard deduction instead of itemizing.
Initially, Congress approved a maximum deduction of up to $300 for monetary contributions made by non-itemizing filers in 2020. The maximum is doubled to $600 for joint filers in 2021.
2 Child Tax Credit: For many taxpayers, the Child Tax Credit (CTC) is “bigger and better” on their 2021 returns. Under the latest legislation, the credit amount is increased from $2,000 per qualified child to $3,000 ($3,600 for children under age six), although the phase-out levels are adjusted downward, and the credit is made fully refundable. Also, parents may have benefitted from advance CTC payments in 2021. These payments are not considered taxable income.
The IRS is mailing Letter 6419 to taxpayers who received advance CTC payments. It shows the amount that should be reflected on your 2021 return.
3 Economic Impact Payments: The government handed out a third round of Economic Impact Payments (EIPs) in 2021. The maximum payment was $1,400 for each qualified individual—$2,800 for a married couple—plus another $1,400 for a qualified dependent. But EIPs may be phased out based on adjusted gross income (AGI).
If you did not receive the full EIP you were entitled to, you may claim a recovery rebate credit on your 2021 return.
4 Dependent care credit: Parents who pay costs of caring for children under age 13 while they work may be eligible for a dependent care credit. Legislation generally enhances the credit for 2021.
Significantly, the limit on qualified expenses is increased from $3,000 to $8,000 for one child; from $6,000 to $16,000 for two or more children. Also, the maximum credit percentage is increased from 35% to 50%, subject to certain phase-outs, and the credit is refundable for 2021.
5 Higher education credits: Generally, parents can claim either the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) for qualified higher education expenses, subject to phase-outs based on modified adjusted gross income (MAGI). But the alternative tuition-and-fees deduction has been repealed and is not available on 2021 returns.
The maximum AOTC is $2,500 per student as opposed to the maximum LLC of $2,000 per filer. But the MAGI phase-out ranges, which previously favored the AOTC, have been equalized, beginning in 2021.
6 Required minimum distributions: After you reach age 72 (age 70½ before 2020), you must take annual required minimum distributions (RMDs) from traditional IRAs and qualified plans like 401(k)s. The amount depends on life expectancy tables and your account balance at the end of the prior year.
RMDs were suspended for 2020, but the rules were revived in 2021, so you must report RMDs on this year’s return.
Do not leave matters to chance. Obtain the guidance you need from your JMF professional tax advisors.
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