By Brighton Samet, Moneta Tax Planning Consultant
This is the time of year that you should be receiving copies of all your necessary tax documents. Besides the normal W-2s and 1099s, this year many taxpayers will also receive Letter 6475 (about the third round of Economic Impact Payments) and Letter 6419 (about the Advance Child Tax Credit Reconciliation) from the Internal Revenue Service (IRS).
Here is more information about how to use these letters and other information you should know for the upcoming tax filing season.
Economic Impact Payments (EIP)/Recovery Rebate Credit
Beginning in March 2021, most eligible taxpayers automatically received the third round of Economic Impact Payments. The maximum payment was $1,400 per taxpayer and qualifying dependent. If your prior year adjusted gross income (AGI) was above $75,000 for single taxpayers or $150,000 for married filing jointly (MFJ), you may have received a reduced amount.
As more tax returns were processed throughout 2021, the IRS may have also sent additional “plus-up” payments if you qualified for a higher payment with updated information. Letter 6475, which will continue to be sent out through March 2022, should list the total paid for 2021.
If you had a child born in 2021, added a dependent, had lower income in 2021 or otherwise did not receive your full amount of the EIP, you may be eligible to claim the 2021 Recovery Rebate Credit on your Form 1040. If you already received the full amount you were eligible for, you do not have to report anything on your 2021 tax return. If your payment based on your 2019 or 2020 tax return information is higher than what you are eligible for based on your 2021 tax return information, you also do not need to pay back any part of the payment you received.
Child Tax Credit (CTC)
From July to December 2021, the IRS sent advance child tax credit payments to taxpayers of up to 50% of the expected CTC. Letter 6419 has the total amount paid in 2021 (married couples receiving the payments will each receive a letter with their amount).
For 2021, the CTC was increased to $3,600 (for children age 5 and under) and $3,000 (for those age 6 through 17). There are two different income phase-outs for the CTC based on modified adjusted gross income (MAGI). The enhanced portion begins to phase out once MAGI exceeds $150,000 if MFJ, $112,500 for head of household (HOH), or $75,000 for single and separate returns. The regular portion ($2,000) of the CTC will begin to phase out once MAGI exceeds $400,000 if MFJ or $200,000 for all others.
Unlike the EIP payments, you may have to repay some or all of the advanced child tax credit payments received if you were paid more than you were entitled to based on your final 2021 tax return. This could happen if you claim fewer dependents or have higher income in 2021 compared to your 2019 or 2020 information. You are required to reconcile the advance payments received to the amount allowed as a credit on the 2021 Form 1040 on Schedule 8812. You will then get to claim any remaining credit or may need to repay any excess received.
Even if you qualify for the full CTC, the advance payments may cause your refund to be smaller or balance due to be higher than previous years.
Deductions for Gifts to Charity
For 2021, there is a special charitable deduction if you take the standard deduction for qualifying cash contributions. The maximum deduction is $600 for married couples filing jointly and $300 for single taxpayers. The deduction is now listed on Line 12b after the standard deduction, so it no longer reduces your AGI like the 2020 special deduction.
For itemizers, taxpayers may elect to deduct up to 100% of qualifying cash contributions for 2021 (the percentage of AGI limitations were increased to 100% for 2020 and 2021 only).
On the first page of the Form 1040, there is a required question for all taxpayers: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
For tax purposes, cryptocurrencies are treated as property and are subject to tax rules applicable to property. For many taxpayers, cryptocurrencies will be a capital asset, so when cryptocurrencies are sold, these taxpayers will recognize either a short-term or long-term capital gain or loss depending on the holding period. If you received virtual currency as compensation for services or disposed virtual currency that you held for sale to customers in a trade or business, you report that income as you would any other income of the same type (for example as wages or on a Schedule C).
April 18 Individual Filing Deadline
- Due to a Washington, D.C. holiday, the individual filing deadline is April 18 instead of April 15 for 2021 tax returns. For taxpayers who live in Maine or Massachusetts, the deadline is April 19 due to the Patriots’ Day holiday in those states.
Child and Dependent Care Credit
- For 2021 only, the child and dependent care credit was enhanced to a maximum of $4,000 for one qualifying child or $8,000 for two or more qualifying children.
Premium Tax Credit If You Have Healthcare Through the Exchange
- For 2021 and 2022, the credit is available for a larger percentage of insurance premiums. The credit is also available for individuals whose income is greater than 400% of the poverty line (who were previously barred from the credit). For 2021, individuals who receive unemployment compensation during 2021 are eligible for the credit under more favorable rules.
Tuition and Fees Deduction Not Available after 2020
- The tuition and fees deduction has been repealed for all tax years after 2020. However, the income limitations for the lifetime learning credit have been increased so that more taxpayers are eligible.
IRA Contributions and Health Savings Account Contributions Allowed Until the Filing Deadline
- Traditional and Roth IRA contributions and health savings account contributions may be made for tax year 2021 through April 18, 2022.
Looking Ahead to 2022
Many of the special provisions enacted due to the pandemic are now over. We must wait to see what changes Congress may consider over the coming months. Progress on the Build Back Better Act stalled last December, so we are still watching negotiations closely to see if there will be major tax policy changes ahead of the midterm election.
As always, we recommend consulting with an appropriately credentialed professional before making any financial or tax planning related decision.
© 2022 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.