By Steve Doster
Here we are, just weeks away from April 15, and there have been a significant number of changes related to filing your 2020 tax returns and increased tax credits for 2021 taxes. Here is a quick summary of some of the most relevant changes and what they might mean for you.
2020 tax deadline extended to May 17, 2021.
The IRS has pushed back the filing deadline and payment deadlines for your individual Federal tax returns to May 17, 2021. While this is good news to many, there are a few very important things to note:
- Some states have yet to comply with this. This means if you are living in a state that has not decided to change the deadline yet, you still need to file your state returns by April 15. California has moved the state tax return filing and payment deadline to May 17 to match the IRS deadline.
- 2021 first quarter estimated taxes are still due April 15. Even if you are not filing your returns by that date, you will still need to pay estimated taxes by then for first quarter to the IRS and possibly the state you live in. California is also following the IRS on this and requiring your first quarter estimates to be paid by April 15.
- Only individual returns are given the delayed filing dates. All business and trust returns are still required to file or extend by April 15.
The first $10,200 of unemployment benefits can be excluded from your taxable income.
This was part of the American Rescue Plan Act of 2021. There is one important detail that most people have not seen regarding this. You must have Adjusted Gross Income (AGI) below $150,000 to be able to get the tax-free treatment. This limit applies to any filing status (Single, Married Filing Jointly, Head of Household) and there is no phaseout. If you are below the $150,000 you get the exclusion and if you are at or above $150,000 you do not get the exclusion.
2021 Child Tax Credit has been increased.
The credit has been increased from $2,000 to $3,000 and if you have a child under the age of six at the close of the calendar year, their credit will be $3,600. The increased credit amount is phased out for taxpayers with the following incomes: Single $75,000; Head of Household $112,500; Married Filing Jointly $150,000. If you are over the phaseout limits, you can still receive the $2,000 credit with the current phaseout limits.
Child and Dependent Care Credit Increased for 2021
For the 2021 tax year, the dependent care credit will be refundable, meaning if the credit is more than taxes owed, you can receive it as a refund. The credit has also been increased to 50% of eligible expenses. This increase makes the credit worth up to $4,000 for one child and $8,000 for two or more children. The credit has Adjusted Gross Income limitations that start at $125,000 at which point the credit is reduced based on income.
Recovery Rebate/Economic Impact Payments Round 3
The IRS is in the process of sending out another round of payments to taxpayers. This time the payment is $1,400 per individual plus another $1,400 per dependent. The IRS will use the most current tax return filed, so either 2019 or 2020, to determine eligibility. These are again based on Adjusted Gross Income and start to phase out at the amounts below. You will be totally phased out if your income is above the second amount:
|Income Phase-out starts||No benefit after income of|
|Head of Household||$112,500||$120,000|
|Married Filing Joint||$150,000||$160,000|
If you qualify, keep an eye on your accounts. You should receive the benefit the same way you have in the past, so either direct deposit, check or debit card.
Business PPP loans and California
Due to the pandemic, many businesses utilized the PPP loan program and subsequent debt forgiveness program. The IRS has said that the loans forgiven would not be considered income and the expenses paid with the money would still be deductible. California does not agree with this currently and is requiring anyone who received loan forgiveness to offset their business expenses by the amount of the loan forgiven. The issue is that now there is legislation in California to change this and comply with federal rules. If this happens, businesses in California will be allowed to deduct expenses and lower their income and taxes for state purposes.
As you can see, we have had a lot of changes and there are still more that will likely be put through before year end. Consider working with a qualified CPA to benefit from all these last-minute changes to our Federal and state tax laws.
— Steve Doster, CFP® is the financial planning manager at Rowling & Associates – a fee-only wealth management and CPA firm helping individuals find their financial freedom. Rowling & Associates works to a fiduciary standard of care helping people with their taxes, investments, and financial planning. Read more articles at www.rowling.com/blog.