Stimulus payments and Recovery Rebate Credits

You’ll need to report any stimulus payments you received in the spring of 2021 on your tax return. If you didn’t get every dollar you should have, you can claim a Recovery Rebate Credit to get the money you deserve.

What’s different: The IRS will send out Letter 6475 in January, which will show the amount you received for 2021. These letters weren’t sent for 2020 stimulus payments.

Why it matters:  To avoid lengthy tax refund delays, you’ll want to use the amounts shown on your Letter 6475 to report your payment and claim any additional money.  Find out more about Letter 6475 and how to validate your amounts if you don’t have your letter.

Child Tax Credit

The Child Tax Credit was expanded in 2021 to provide more money for more families. With this 2021 tax law change, up to half of the credit was paid as advance payments, while the other part can be claimed when you file.

What’s different: This is the first time this credit has been sent in advance. You’ll need to accurately report the advance amount on your 2021 returns in order to claim the remainder of your credit. The IRS will send Letter 6419 to you in January, which will show the amount of advance payment you received.

Why it matters: To avoid lengthy tax refund delays, you’ll want to use the amounts shown on your Letter 6419 to report your advance payments and claim the rest of your credit. Find out more about Letter 6419 and how to validate your amounts if you don’t have your letter.

Earned Income Tax Credit

The Earned Income Tax Credit has always been a valuable tax credit but understanding who is eligible for it has always been a bit complicated.

What’s different: Changes in 2021 expanded the maximum credit for childless workers from $538 to about $1,500, making the credit more valuable for this group. Additionally, changes around age limits generally lowered the bottom age limit to 19 and now allow for those without children to claim the credit if they are 65 or older. These changes are only in place for 2021 taxes.

On top of these changes, you can also choose to use your 2019 income to calculate your Earned Income Credit amount if your 2019 earned income is larger than your 2021 earned income and that provides a larger credit (this is called the Lookback Rule). However, take note, using your 2019 income may require some additional time to process your refund.

Why it matters: The Earned Income Credit is a refundable credit, meaning after it helps reduce your tax bill, you could potentially get money back. With the changes above and the potential for a delay related to using the Lookback Rule, it could really payoff to have the right tax expert on your side

Child and Dependent Care Credit

The Child and Dependent Care credit allows families to claim expenses related to the care of a child or someone who is who is physically or mentally unable to care for themselves.

What’s different: For 2021 taxes, families may now claim a refundable credit of up to 50% of qualifying expenses, meaning they could claim a maximum credit of:

• $4,000 for one qualifying child (based on $8,000 of expenses)
• $8,000 for two or more qualifying children (based on $16,000 of expenses)

Why it matters: As a refundable credit, this tax benefit not only lowers the tax you owe, it also can mean getting money back.

Unemployment income taxability

Normally unemployment income is taxable. However, if you had unemployment income in tax year 2020, you were able to exclude up to $10,200 of that compensation as income.

What’s different: For 2021, the tax law changes back to what it was before 2020. That means, any unemployment compensation you received will be subject to income taxes.

Why it matters: If you received unemployment income in 2021, you may not be aware of the taxes due. Additionally, if you had taxes withheld from your unemployment benefits as they were paid out, you have covered a portion of your tax liability for this income.

Education credit changes

The cost of college is high. Thankfully, education related tax benefits can help make college more affordable for students and families. Several changes were made to these tax benefits to make them more streamlined.

What’s different: While the Tuition and Fees deduction has not been extended for tax year 2021, more people are now eligible for the Lifetime Learning Credit this year. Specifically, the phase out range for this credit, which carries a value of up to $2,000, has been increased to $80,000-$90,000 ($160,000 to $180,000 for joint filers).

Why it matters:  While education tax benefits have been streamlined, there are other factors to consider around choosing between the Lifetime Learning Credit or American Opportunity Credit when filing as a student. 

Charitable contributions

When the standard deduction was doubled in 2017, far fewer taxpayers itemized deductions, including those related to charitable contributions.

What’s different: A 2021 tax law change allows for a deduction for up to $600 in cash charitable contributions for those married filing jointly ($300 for individuals and married filing separately).

Why it matters: This deduction is available to most taxpayers whether you use the standard deduction or itemize your deductions.

Premium Tax Credit for health insurance

For those who buy health insurance from the federal or a state marketplace, the Premium Tax Credit makes health insurance premiums more affordable.

What’s different: A larger tax credit was put in place for 2021 and 2022. In order for households to pay a smaller share of their income towards premiums, they get a higher premium tax credit.

Why it matters: You can use the credit to pay a smaller share of your income towards the premium.

1099-K rule change (Gig workers)

Previously, workers who received payments via credit card or a third-party payment network received Form 1099-K if they had more than 200 individual payments and $20,000 in payments. When you report this income, you also report the expenses associated with your business.

What’s different: Starting in 2022, these thresholds have been significantly lowered. Now you only need payment transactions of $600 or more.

Why it matters: While the first 1099-Ks under this rule won’t be sent until Jan. 2023, if you expect to meet this new threshold, you’ll have additional tax responsibilities—this year. For starters, you may want to consider making or adjusting quarterly estimated tax payments to help avoid an unexpected tax bill and to avoid underpayment penalties.

100% Business Meal Tax Deduction

To incentivize visits to restaurants after the pandemic, an expanded business meal deduction was added for 2021 and 2022.

What’s different: The deduction now covers 100% of business meals that are dine-in, catered or take-out; and a 50% limit is in place for food and beverage not from restaurants.

Why it matters: If your business hosts a meal that meets the rules for business meal deductions, you’ll want to gather up your receipts, so you can claim the deduction for 2021—and 2022.

Employer incentives and payroll credits for small business

The 2021 American Rescue Plan Act put in place several new or expanded credits that impacted employer payroll returns, especially among small businesses. This business stimulus relief was designed to help keep people on payroll through a long period of economic uncertainty.

What’s different: Payroll credits for continuing to pay employees in adverse situations were extended and a new credit for covering health insurance premiums was added.

Why it matters: There are multiple credits employers can use for their payroll tax filings. If you’re a small business owner and you have people on payroll, or if this is your first year with employees on a payroll, there may be credits and incentives you’re unaware of for payroll quarters during 2021.