By Brittany L. Komorowski, CFP
2020 was a whirlwind of a year with a flurry of changes happening in all aspects of life. As for the tax world, multiple bills were passed in the last year and a half, many of which contained various tax law changes. A bill was even passed in the middle of tax season! Some of these changes only applied to 2020, while others may apply for a few years. It’s enough to keep tax preparers on their toes and no doubt leave many confused on the current rules. Below is a breakdown of my top six recent tax law updates to know as a millennial tax filer preparing for the 2021 season.
1. Deduction of Up to $600 for Cash Charitable Donations
After the passing of the Tax Cuts and Job Act in 2017, the majority of tax filers no longer itemized their deductions on their tax returns in light of the new much higher standard deduction. This means you most likely are not able to deduct any charitable donations you made throughout the year.
The CARES Act, passed in March of 2020, allowed cash charitable donations to be deducted in-addition to the standard deduction. For 2021, up to $300 of cash charitable donations made will be fully deductible for single filers with the amount increasing to $600 deductible for married filing joint filers. I suggest you keep your charitable donation receipts throughout the year as they will benefit you in 2021! Please note this is only for cash donations, donations of things to thrift stores, etc., do not apply.
2. Significant Changes to the Child Tax Credit
As a part of the American Rescue Plan Act, passed in March of 2021, significant changes have been made to the child tax credit that are only applicable for 2021. The first notable change is the amount parents will receive increased from $2,000 to $3,000 per child, with children under 6 receiving an additional $600. It also extended the benefits to allow 17-year-old children to qualify. While this credit is still subject to income limitations, if you do qualify, the IRS made this amount fully refundable. This means if your income qualifies you for the full amount, you will receive the full amount regardless of your tax liability.
Completely new to 2021 and applying to 2021 only, the IRS is also paying out the child tax credit in advance with monthly payments beginning in July and ending in December. The monthly payments are $250 per child aged 6-17 and $300 per child aged 0-5. However, if your income is too high, these amounts will be limited. These payments are considered pre-payment of the tax credit you will receive on your 2021 tax return. The IRS is set to launch a web portal in early July to manage this new system, including the option to opt out and instead receive the full credit on your return. If you normally rely on the child tax credit to pay your taxes owed in April, it may be wise to opt out and instead receive this money on your tax return when filing.
3. Increased Dependent Care Credit
The American Rescue Plan Act also made some positive changes for working parents whose children or dependents are enrolled in daycare. The Child and Dependent Care Tax Credit was increased to 50% of $8,000 of paid care costs, or a maximum of $4,000 per child or dependent. To be eligible the child must be age 12 or younger or a dependent who is not able to work. This credit is also subject to income limitations so if you make too much, you may not qualify. New to 2021, this credit is fully refundable, meaning that if you qualify, the amount will not be limited.
4. Increased Income Limits on Lifetime Learning Credit
The lifetime learning credit is an education tax credit you’d receive for paying tuition after already having received four years of education tax credits previously. This credit is great for those going back to school or in graduate school. The CARES Act increased the income limitation on this credit, meaning more higher earning individuals may qualify. For 2021, you may be eligible for some credit if your income is below $90,000 as a single filer or $180,000 married filers.
5. Energy Efficient Tax Credits extended through 2021
Good news for all the homeowners considering updates after the pandemic, the energy efficient tax credit has been brought back and extended through December 31, 2021. You can receive a tax credit for energy efficient improvements made to your home if they are considered qualifying property, such as Energy Star-rated windows, insulation, furnace, etc. These updates could qualify you for a tax credit of up to $500. Homeowners interested in solar energy systems as well could receive an additional tax credit of up to 26% of the qualified solar energy system cost. If you are considering home improvements in 2021, I suggest keeping receipts for any energy efficient improvement made and discussing this further with your tax preparer.
6. New W-4 form effective 2020
A new W4 form was introduced in 2020 which is the form that determines your tax withholding coming out of your paychecks. The W-4 form is submitted to your employer and determines the amount of taxes you pay to the government on each check. In 2020, this form was updated to align with the Tax Cuts and Jobs Act of 2017, removing the number of exemptions from the form. The IRS has released a new online tool to assist with completing the form called the Tax Withholding Estimator. If you are considering updating your withholding for 2021, I suggest utilizing the IRS’s online tool to ensure the form is completed correctly.
While this is a high-level overview of my top six updates to know, there have been many, many updates made. I recommend you review your specific situation with your tax preparer if you have further questions on how any of the recent bills passed affect you. Please note this post only includes changes which have officially been passed into law.
About the author: Brittany Komorowski, CFP ®, EA
Brittany Komorowski, CFP ®, EA is a financial planner and tax advisor with Charter Capital Management. Brittany combines her experience of comprehensive financial planning in addition to detailed tax planning to prepare holistic plans for her clients. She is passionate about helping her clients reach their goals and take charge of their financial lives.
Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of Charter Capital Management. This article is for general information only and is not intended to serve as specific financial, accounting, legal, or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed.
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