By Brittany L. Komorowski, CFP
2020 was a turbulent year with a flurry of changes in all aspects of life. As for the tax world, several bills have been passed in the past year and a half, many of which have included various tax law changes. A bill was even passed in the middle of the tax season! Some of these changes were only for 2020, while others may be for a few years. It’s enough to keep tax advisors busy and undoubtedly leave many in the dark about the current rules. Below is a breakdown of my top six most recent tax law updates that I should know as a Millennial tax filer as I prepare for the 2021 season.
1. Deduction of up to $ 600 for cash donations
After the passing of the Tax Reduction and Employment Act in 2017, the majority of taxpayers no longer reported their deductions in their tax returns due to the new, significantly higher standard deduction. This means you are unlikely to be able to withdraw charity donations throughout the year.
The CARES law passed in March 2020 made it possible to deduct cash donations in addition to the standard deduction. Up to $ 300 in cash donations to charities for single parents will be fully deductible for 2021, with the amount increasing to $ 600 for married co-applicants. I suggest that you keep your donation receipts all year round as they will benefit you in 2021! Please note that this only applies to monetary donations, donations in kind to thrift stores, etc.
2. Significant changes in the child tax credit
As part of the American Rescue Plan Act, passed in March 2021, significant changes have been made to the child tax break that will only apply to 2021. The first notable change is the increase in the amount parents receive from $ 2,000 to $ 3,000 per child, with an additional $ 600 for children under the age of 6. It also expanded benefits to include 17 year old children. While this credit is still subject to income restrictions, the IRS has fully refunded this amount if you qualify. That is, if your income qualifies you for the full amount, you will receive the full amount regardless of your tax liability.
Completely new for 2021 and only valid for 2021, the IRS also pays out the child tax credit in advance with monthly payments from July to December. Monthly payments are $ 250 per child ages 6-17 and $ 300 per child ages 0-5. However, if your income is too high, these amounts will be capped. These payments are considered an advance payment of the tax credit that you will receive on your 2021 tax return. The IRS will set up a web portal in early July to administer this new system, including the option to opt out and instead receive full credit on your return. If you usually rely on the child tax credit to pay your April taxes, it may be wise to de-register and receive that money when filing your tax return instead.
3. Increased credit for those in need of care
The American Rescue Plan Act also brought some positive changes for working parents whose children or loved ones are enrolled in daycare. Child and dependent care tax credit increased to 50% of $ 8,000 of care paid or a maximum of $ 4,000 per child or dependent. A child who has reached the age of 12 or is not able to work is eligible. This credit is also subject to income restrictions. So if you earn too much, you may not be able to qualify. As of 2021, this credit will be fully refundable, meaning there is no limit to the amount if you qualify.
4. Increased income limits for lifelong learning
Lifelong Learning Credit is an education tax reduction that you would receive for paying tuition fees after having received four years of education tax reduction. This loan is great for those going back to school or graduating from college. The CARES Act has increased the income limit for this credit, which means more people with higher incomes can be eligible. In 2021, you may be eligible for some credit if your income is less than $ 90,000 as a single parent or less than $ 180,000 as a married applicant.
5. Energy efficient tax credits extended to 2021
Good news for any homeowner considering post-pandemic updates. The energy efficiency tax credit has been returned and extended until December 31, 2021. You can get a tax credit for energy efficient improvements to your home if they are considered qualifying property. B. Energy Star rated windows, insulation, oven, and more. These updates can qualify you for a tax credit of up to $ 500. Homeowners interested in solar systems can also receive an additional tax credit of up to 26% of the qualified solar system costs. If you are considering a renovation in 2021, I recommend that you keep receipts for any energy efficiency improvements made and further discuss this with your tax advisor.
6. New W-4 form from 2020
In 2020, a new W4 form was introduced that determines your tax withholding from your paycheck. Form W-4 is presented to your employer and determines the amount of tax you pay on each check to the government. In 2020 this form was updated to align with the Tax Cuts and Jobs Act of 2017, which removed the number of exemptions from the form. The IRS has released a new online tool for filling out the form called the Tax Withholding Estimator. If you’re considering updating your withholding tax for 2021, I recommend using the IRS’s online tool to make sure the form is filled out correctly.
While this is a high-level overview of my top six updates, there have been many, many updates. I recommend discussing your specific situation with your tax advisor if you have any further questions about how any of the recently passed bills might affect you. Please note that this article only contains changes that have been officially implemented into law.
About the author: EA
Brittany Komorowski, CFP ®, EA is a financial planner and tax advisor with Charter Capital Management. Brittany combines her extensive financial planning experience with detailed tax planning to create holistic plans for her clients. She is passionate about helping her clients achieve their goals and take control of their financial lives.
Important Notice: The opinions of the featured authors are their own and may not exactly reflect those of Charter Capital Management. This article is for general information only and is not intended as specific financial, accounting, legal, or tax advice. Individuals should speak to qualified professionals based on their individual circumstances. The analysis contained in this article may be based on information provided by third parties and may be out of date or otherwise replaced without prior notice. The information provided by third parties is believed to be reliable, but its correctness and completeness cannot be guaranteed.
Email Jeffrey Levine, CPA / PFS, Chief Planning Officer at Buckingham Wealth Partners to: [email protected].