With all the changes that occurred during tax season we thought we would provide an update to a few key items that may affect you.
HOMESTEAD/PROPERTY TAX/RENTER’S CREDIT
We have been working on these returns and will mail out a copy of taxpayers that are eligible for these refunds by the end of July. These returns are due August 15th with refunds being issued starting in August for Renters and September for Homeowner’s. For those of you that did not drop off your 2021 property tax statement we did pull your tax statement off your local county’s website if it was available.
RETURNS WITH CHANGES AS A RESULT OF THE CHANGES TO UNEMPLOYMENT TAXATION
If your Adjusted Gross Income (Line 11, Form 1040) was less than $150,000 and you received unemployment in 2020, the first $10,200 is not taxable at the federal level or in most states after a new tax law was passed in Mid-March 2021. Once federal passed this, a majority of states followed suit in making it not taxable in their state, or are still in the process of finalizing the exclusion of this from your income (MN still has not written final legislation to exclude this for 2020). At this time Federal and State authorities are asking that we not file amended returns since they are taking the steps on their end to adjust affected returns and to send additional refunds once they have completed the processing on their end. If it is determined that your will need to file an amended return to receive the additional refund, we will contact you directly to file the amended return, likely by the end of August.
CHILD TAX CREDIT FOR 2021
If you received a child tax credit on your 2020 income tax return you may have received a letter explaining an increased child tax credit for the 2021 tax year and the option for you to receive an advance the child tax credit this year. In some cases, you may want to take the advance child tax credit through a monthly or quarterly advancement. In other cases, you will want to opt out of the advance payment. For the 2021 tax year only, the Child Tax Credit Increased from $2,000 to $3,000 for children under 17 and $3,600 per child under 6. This credit will be phased out by $50 for every $1,000 your income exceeds the previously stated income thresholds. Please note the following captures five common examples to help determine if you should opt out. Each example assumes the incomes are below $150,000 for Married Filing Joint, $112,500 for Head of Household and $75,000 for other filing statuses.
Child is not claimed on your return every year due to a divorce and/or custody agreement.
Recommendation: Opt out of the advance child tax credit. If you receive an advance child tax credit for a child that you will not be able to claim you will have to pay back the credit when you file your taxes.
Child is no longer a dependent of yours.
Recommendation: Opt out of the advance child tax credit. If you receive an advance child tax credit for a child that you will not be able to claim you will have to pay back the credit when you file your taxes. Additionally, if they will not be a dependent at any point in future tax years you may want to increase your income tax withholding or quarterly estimated tax payments.
You generally owe taxes each year.
Recommendation: Opt out of the advance child tax credit. Taking the advanced credit now will only increase the amount you will owe when you file your tax return.
You generally break close to even due to receiving the child tax credit. For example, you receive a $6,000 Child Tax Credit on your Tax Return which results in a $1,500 refund. If you do not opt out so you get the $6,000 child tax credit when you file your tax return, you would now owe $4,500 since you received the credit in advance of filing your tax return if you do not adjust your withholding.
Recommendation: Opt out of the advance child tax credit because you are currently using the child tax credit at the time of filing to cover your tax liability.
You receive a refund more than what your child tax credit is. For example, you receive a Child Tax Credit of $6,000 and your refund is $10,000 ($4,000 from your income tax withholding and $6,000 from tax credits).
Recommendation: Opt-in since your full child tax credit is refunded to you anyways. The main reason to opt out would be because you like to receive the larger refunds at tax season for a specific reason.
Other Comments for Child Tax Credit:
The most common way to determine whether you should opt-in or opt-out should be based on your prior year return and if there are no changes to your dependents being claimed during the year. Unfortunately, there is no “blanket” answer to give each taxpayer as each taxpayer’s tax situation is different. Additionally, while these credits are expected to start being issued in July for those that do not opt out, there are some concerns that the initial roll out will be delayed. As with the stimulus payments, we will not be able to determine when the IRS will be issuing these credits to you, or the amount they will be sending you. You should be able to find these amounts by logging into the IRS portal when it is available or by contacting the IRS directly at 800.829.1040.
By default, you will be issued these credits in advance. You will need to login to the IRS portal when it becomes available to opt out of receiving the child tax credit in advance so that you get any child tax credits at the time of filing.
CHILD AND DEPENDENT CARE CREDIT (DAYCARE CREDIT)
This credit has been increased for 2021 because of the following changes:
- Eligible amount of expense towards the credit increased from $3,000 per child to $8,000 per child or $16,000 for multiple kids.
- Maximum credit increased from 35% of expenses to 50%.
- The percentage is gradually reduced from 50% to 20% for people with an AGI between $125,001 and $183,001. It stays at 20% for families with an AGI from $183,001 to $400,000, but then it is gradually reduced again from 20% to 0% for taxpayers with an AGI above $400,000. If your AGI is above $438,000, you will not get a credit.