Tax Changes Could Affect Your Tax Situation in 2021

Workers Can Set Aside More in a Dependent Care FSA

For 2021, the maximum amount of tax-free employer-provided dependent care benefits increased from $5,000 to $10,500. An employee can set aside $10,500 in a dependent care FSA if their employer has one instead of the normal $5,000. Workers can only do that if their employer adopts this change. Health FSAs have an additional option of allowing participants to roll over up to $550 of unused funds at the end of the plan year and still contribute up to the maximum in the next plan year. Health FSA plans can elect either the carryover or grace period option but not both.

Childless EITC Expanded for 2021

For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC), a fully refundable tax benefit. In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don't qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.

Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.

Changes Expanding EITC for 2021 and Future Years

 Singles and couples who have Social Security numbers can claim the credit, even if their children don't have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn't qualify for the credit.

Your investment income must be $3,650 or less. Starting in 2021 (filing in 2022) that amount increases to $10,000.

In 2021, you can qualify for the EITC if you’re separated but still married. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for at least six months out of the year, and must have a qualifying child living with them for more than half the year.

Child and Dependent Care Credit Increased for 2021 Only

For 2021, the top credit percentage of qualifying expenses increased from 35% to 50%. In addition, eligible families can claim qualifying child and dependent care expenses of up to $8,000 for one qualifying individual (up from $3,000 in prior years) or $16,000 for two or more qualifying individuals (up from $6,000 before 2021). This means that the maximum credit in 2021 of 50% for one dependent's qualifying expenses is $4,000, or $8,000 for two or more dependents. Important to note that when figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses.

Also of significance is that in 2021, for the first time, the credit is fully refundable. As such, an eligible family can get it, even if they owe no federal income tax.

Student Loan Forgiveness

The ARPA excludes federal student loan debt that is forgiven in 2021 through 2025 from gross income. The provision applies to student loans provided by the federal government, state governments, and eligible educational institutions, as well as certain private education loans as defined in the Truth-in-Lending Act.

Please contact our certified public accountant if you have questions or need additional information on how these changes will impact you.

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Capital Gains Tax on Sale of Stocks

If you're an investor who makes money by buying and selling stocks, you may owe capital gains tax when you file your tax return this year. If you lost money, you may be able to deduct that loss and reduce your income. Here's what you need to know about capital gains tax:

Capital Gains and Losses Defined

A capital gain or loss is the difference between your basis - the amount you paid for the asset - and the amount you receive when you sell an asset. All capital gains (or losses) must be reported on your tax return.

Losses Limited to $3,000

If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return to reduce other income, such as wages. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

Carryover of Losses Allowed

If your net capital loss exceeds the limit you can deduct for the year, the IRS allows you to carry the excess into the next year, deducting it on that year’s return..

Long and Short Term Gains and Losses

Capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. The long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income and filing status. Note Some investors may owe an additional 3.8% depending on income thresholds.

If you hold it one year or less, your capital gain or loss is short-term. The short-term capital gains tax rate equals your ordinary income tax rate— your tax bracket.

Net Capital Gain

If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. Subtract any short-term losses from the net capital gain to calculate the amount of net capital gain you must report.

How to minimize capital gains taxes

Hold on

Whenever possible, hold an asset for a year or longer so you can qualify for the long-term capital gains tax rate, since it's significantly lower than the short-term capital gains rate for most assets. Our capital gains tax calculator shows how much that could save.

Exclude home sales

To qualify, you must have owned your home and used it as your main residence for at least two years in the five-year period before you sell it. You also must not have excluded another home from capital gains in the two-year period before the home sale. If you meet those rules, you can exclude up to $250,000 in gains from a home sale if you’re single and up to $500,000 if you’re married filing jointly.

 Use tax-advantaged accounts

These include 401(k) plans, individual retirement accounts and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means you don’t have to pay capital gains tax if you sell investments within these accounts.

Reporting Capital Gains and Losses

Report capital gains or losses using Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D (Form 1040), Capital Gains and Losses to summarize capital gains and losses.

Please our CPA office if you need more information about reporting capital gains and losses.

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Advance Payments for 2021 Child Tax Credit

Child Tax Credit for 2021

On July 15, the IRS announced that millions of American families started receiving monthly Child Tax Credit payments. The payments will continue each month. Generally, anyone who receives a payment in July will also receive a payment each month for the rest of 2021 unless they unenrolled. Future payment dates are Aug. 13, Sept. 15, Oct. 15, Nov. 15, and Dec. 15.

The child tax credit and advance payments are based on several factors, including the age of your children and your income.

The credit for children ages five and younger is up to $3,600 with up to $300 received in monthly payments.

The credit for children ages six to 17 is up to $3,000  with up to $250 received in monthly payments.

To qualify for the child tax credit monthly payments, you (and your spouse if you file a joint tax return) must have:

• Filed a 2019 or 2020 tax return and claimed the child tax credit or given the IRS your information using the non-filer tool

• A main home in the U.S. for more than half the year or file a joint return with a spouse who has a main home in the U.S. for more than half the year

• A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number

• Income less than certain limits

You can take full advantage of the credit if your income (specifically, your modified adjusted gross income) is less than $75,000 for single filers, $150,000 for married filing jointly filers and $112,500 for head of household filers. The credit begins to phase out above those thresholds.

Higher-income families (e.g., married filing jointly couples with $400,000 or less in income or other filers with $200,000 or less in income) will generally get the same credit as prior law (generally $2,000 per qualifying child) but may also choose to receive monthly payments. 

Amounts received in advance will not be available when your 2021 tax return is filed, which may reduce or change your refund.  If you receive advance payments that you are not entitled to, you will repay those upon filing your 2021 tax return.  In January 2022, the IRS will send Letter 6419 summarizing advance payments made, and it should be retained with other tax documents.

IRS Website and Portal

The IRS has created a website devoted to the Advance Child Tax Credit Payments in 2021.The IRS uses the website to communicate information to and receive information from taxpayers. Currently, the website includes tools to unenroll or manage payments, submit information for non-filers, and check eligibility according to the IRS. Please note that if you are married filing jointly, and choosing to unenroll, each spouse will have to do that separately. 

IRS Advance Child Tax Credit Portal

Please contact our office if you have questions or need additional information on how these changes will impact you.

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