Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season. Below is a summary of the highlights in recent tax law changes to help you plan.
Economic impact payments (EIPs)
The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return. If you received an EIP as an advance payment, you should receive a letter from the IRS. Keep this for record-keeping purposes to help determine any potential adjustment.
Child tax credit
As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:
· Amount has increased for certain taxpayers
· Is fully refundable (meaning taxpayers will receive a refund of the credit even if they don’t owe the IRS)
· May be partially received in monthly payments
· Is applicable to children age 17 and younger
The IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis. I am here to help you navigate any questions to make sure you get the best benefit for your family.
Charitable contribution deductions
Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers). Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%).
Unemployment compensation
Another thing to note that's different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021.
State tax obligations related to teleworking arrangements
The pandemic has spawned changes in how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements could potentially have tax implications that should be considered by you and your employer.
Fraudulent activity remains a significant threat
Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:
- Receive a notice or letter from the IRS regarding a tax return, tax bill or income that doesn’t apply to you
- Get an unsolicited email or another form of communication asking for your bank account number, other financial details or personal information
- Receive a robocall insisting you must call back and settle your tax bill
- Gift cards are never used to make tax payments
Keep your personal financial information safe.
Virtual currency/cryptocurrency
Virtual currency transactions are becoming more common. There are many different types of virtual currencies, such as Bitcoin, Ethereum and non-fungible tokens (NFTs). The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally has tax impacts.
Additional tax and retirement planning considerations
· Make the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans.
· Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible.
· Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($15,000 per donee, $30,000 for married couples) to help save on potential future estate taxes.
· Consider a VT529 plan to help save for education; you can benefit with a 10% Vermont state income tax credit on annual contributions deposited for college or training after high school.
· Take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for your future.
· Review withholding and estimated tax payments and assess any liquidity needs.
If you have any questions related to your year-end tax planning, please contact me.
