2021 Tax Law Changes

by | Jan 11, 2022

It is easier to keep up with Kardashians than with ever-changing tax laws!! No wonder it gets challenging to file your taxes. You have been closely following news about all tax-related changes and then you blinked and now you don’t know what you missed! Luckily, the team at NexGen Tax is here to walk you through the must-know tax law changes for 2021, so you can file your taxes with confidence. Top 10 Must-know changes for 2021 taxes Here is a summary of the top tax law changes for 2021 and a brief outline of what has changed along with the reason why it could matter to you.

Need help navigating 2021 tax law changes? NexGen Tax team of fully vetted accounting and tax professionals will evaluate your tax situation and can help you determine whether you qualify for a deduction and identify other opportunities to minimize your taxes. Contact our Tax Services team to learn how legislation can impact you or can benefit you. Reach out to us today.

2021 Tax Changes Impacting Individual Tax Filing

Stimulus payments and Recovery Rebate Credits

You need to report any stimulus payments you received in the spring of 2021 on your tax return. At the time of tax filing, if you realize that you didn’t get every dollar you should have, you can claim a Recovery Rebate Credit to get the money you deserve. Unlike last year, the IRS will send out Letter 6475 in January to everyone who received the Stimulus payments, which will show the amount you received for 2021. To avoid tax refund delays, you may 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 amount 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. To provide relief to families during difficult COVID-19 pandemic times, this is the first time child tax credit has been sent in advance to families. As part of your 2021 tax filing, you need to accurately report the advance amount on your 2021 returns to claim the remainder of your child tax credit. The IRS will send Letter 6419 to you in January, which will show the amount of advance payment you received. To avoid tax refund delays, you may want to use the amount 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 amount if you don’t have your letter. You can estimate the Child Tax Credit with our child tax credit calculator.

Earned Income Tax Credit

The Earned Income Tax Credit has always been a valuable tax credit for families whose income falls beyond a certain threshold but understanding who is eligible for it has always been a bit complicated. For the tax year 2021, the IRS has expanded the maximum credit for childless workers from $538 to about $1,500, making this credit even more valuable. Additional changes include lowering the bottom age limit to 19 and allowing those without children to claim the credit if they are 65 or older. These changes are new for 2021 tax filing. Besides this, 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, keep in mind that if you decide to use your 2019 income for calculation, it might take the IRS more time to process your refund. As you may already know the Earned Income Credit is refundable, meaning after it helps reduce your tax bill, you could potentially get your money back. With the changes above and the potential for a delay related to using the Lookback Rule, it is always advisable to get help from a tax expert to file your taxes.  NexGen Taxes team of fully vetted accounting and tax professionals will evaluate your tax situation, and analyze to figure out if choosing to use the Lookback Rule can qualify you for a better refund and help you in minimizing your taxes.  

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 physically or mentally unable to care for themselves. While filling 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)

As this is a refundable credit, this tax benefit not only will help in lowering the tax you owe, but it also can potentially help you in getting your money back. You can estimate the Child Tax Credit with our child tax credit calculator.

Unemployment Income Taxability

Historically unemployment income is considered taxable income by the IRS. However, in the tax year 2020 due to the pandemic, the unemployment income up to $10,200 was excluded for tax purposes. For tax filing for 2021, the tax law has changed back to what it was before 2020 which means, any unemployment compensation received will be subject to income taxes. If you received unemployment income in 2021, please make sure to include that in your taxable income. In case, you had taxes withheld from your unemployment benefits as they were paid out, you might have already covered a portion of your tax liability for this income.

Education Credit Changes

The cost of going to college is high. However, education-related tax benefits can help make college more affordable for students and their families. For the tax filing year, 2021 few changes have been made to these tax benefits to make them more streamlined. While the Tuition and Fees deduction has not been extended for the tax year 2021, eligibility has been extended for more people for the Lifetime Learning Credit. To extend the eligibility, the phase-out range for this credit has been increased to $80,000-$90,000 for single filers and from $160,000 to $180,000 for joint filers. As such this credit still carries a value of up to $2,000 While the eligibility for the Lifetime Learning Credit for higher education has been extended, American Opportunity Credit still gives you a better refund. However, you need to carefully review other factors to consider around choosing between the Lifetime Learning Credit or American Opportunity Credit when filing as a student or filing with a dependent student. Wrongfully applied education credits are one of the leading causes of Tax audits but the IRS. Get help from the NexGen Taxes team of fully vetted accounting and tax professionals to which credit is best suited for your tax situation.

Charitable Contributions

When the standard deduction was doubled in 2017, far fewer taxpayers were still able to itemize their deductions. This impacted the deductions related to charitable contributions as well. The 2021 tax law change allows for a deduction of up to $600 in cash charitable contributions for those married filing jointly and up to $300 for individuals and married filing separately. This deduction is available to all taxpayers whether you use the standard deduction or itemize your deductions. So make sure you keep the receipts of your charitable contributions handy and use this deduction to lower your tax liability. 2021 & 2022 Tax Changes

Premium Tax Credit For Health Insurance

If you are one of those who buy health insurance from the federal or state marketplace, the Premium Tax Credit gives health insurance premiums give you relief and makes it more affordable. A larger tax credit was put in place for the tax years 2021 and 2022. For households to pay a smaller share of their income towards premiums, they get a higher premium tax credit. You can use the credit to pay a smaller share of your income towards the premium.

Change Impacting Business Tax Filing

100% Business Meal Tax Deduction

To incentivize visits to restaurants after the pandemic, an expanded business meal deduction was added for the tax years 2021 and 2022. Unlike previous years 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 beverages not from restaurants. So start gathering receipts on your business meals that meet the criteria for business meal deductions, so you can claim the deduction for the tax years 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 the payroll through a long period of economic uncertainty. Payroll credits for continuing to pay employees in adverse situations were extended and a new credit for covering health insurance premiums was added. There are multiple credits employers can use for their payroll tax filings. If you’re a small business owner and you have people on the 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. NexGen Taxes team of fully vetted accounting and tax professionals will evaluate your tax situation, and analyze to figure out what credits your business can qualify for to help you in minimizing your taxes.

2022 Tax Changes

A major change coming in for tax year 2022 that impacts gig workers

1099-K Rule Change For 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. Starting in 2022, these thresholds have been significantly lowered. Now you only need payment transactions of $600 or more. 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. Need Help Navigating 2021 Tax Laws? With the ever-changing tax laws, you may want to work with a tax pro to have peace of mind. We’re ready to help you in tax season 2021! Get started with filing taxes online with the NexGen Taxes team of fully vetted accounting and tax professionals who will analyze your tax situation to help minimize your taxes. We are here for you 24/7, reach out to us today.

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