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Child Tax Credit Payments Have Begun

The first advance payment from the newly expanded child tax credit was recently sent out by the IRS. Payments are scheduled to be made on the 15th of each month through December.
The idea of advance payments made for a refundable credit confuses a lot of people, so here’s what you need to know.

Background

For the 2021 tax year, an expanded child tax credit reduces your tax bill by $3,600 if you have a qualifying child that’s age 5 or under, or by $3,000 if you have a qualifying child from age 6 to 17.

If the total amount of the child tax credit for your family exceeds the total taxes you owe, you’ll receive the amount of the credit as a refund.

Child tax credit advance payments

Instead of waiting to file your tax return to receive the entire amount of your child tax credit, the IRS has been directed by Congress to send 50% of the credit to you in six monthly payments beginning in July 2021.

For example, consider the hypothetical example of a family that has three kids, ages 10, 12 and 16. Assume that this family’s income is not too high and that their children meet the IRS definition of a qualifying child. Instead of waiting until 2022 when they file their 2021 tax return to receive the entire $9,000 child tax credit, they can get paid half of the child tax credit amount, or $4,500, in 2021.

The advance payments began July 15 and continue for six months until December 15. The family in this example would receive six payments of $750 starting July 15, for a total of $4,500.

What you need to know

The monthly payments are automatic. You’ll automatically receive advance payments if:

  • You filed a 2019 or 2020 tax return and claimed the credit, OR
  • You gave information in 2020 to receive the Economic Impact Payment using the IRS non-filer tool, AND
  • The IRS thinks you are eligible, AND
  • You did not opt-out of the early payments.

Register with the IRS. If you didn’t file a 2019 or 2020 tax return but are otherwise eligible for the child tax credit, you’ll need to register with the IRS to receive the child tax credit. You can use the IRS Child Tax Credit Non-filer Sign-up Tool to find out if you need to register.

Consider if you should opt out of the advance payments. Getting half of your child tax credit ahead of time may not be the right move for everyone. For example, if your 2021 income ends up higher than expected, you may need to pay back the advance payments when you file your tax return. To opt out, use the IRS Child Tax Credit Update Portal.

Plan Now to Lower Your 2021 Tax Bill

Now is the time to begin tax planning for your 2021 return. Here are some ideas:

Contribute to retirement accounts. Tally up all your 2021 contributions to retirement accounts so far, and estimate how much more you can save between now and December 31. If you are able, consider investing in an IRA or increasing your contributions to your employer-provided retirement plans. Remember, you can reduce your 2021 taxable income by as much as $19,500 by contributing to a retirement account such as a 401(k). If you’re age 50 or older, you can reduce your taxable income by up to $26,000!

Contribute directly to a charity. Even if you don’t have enough qualified expenses in order to itemize your deductions, you can still donate to your favorite charity and cut your tax bill. For 2021, you can reduce your taxable income by up to $300 if you’re single and $600 if you’re married by donating to your favorite charity.

Consider a donor-advised fund. With a 2021 standard deduction of $12,550 if you’re single and $25,100 if you’re married, you may not be able to claim your charitable donations as a tax deduction if the total of your annual donations is below these dollar amounts. As an alternative, consider donating multiple years-worth of contributions to a donor-advised fund if you have the available cash so you can exceed the standard deduction this year. Then make your cash contributions from the donor-advised fund to your favorite charities over the next three years.

Increase daycare expenses. If you or your spouse work and have children in daycare, or have an adult that you care for, consider using a daycare so you and a spouse can both work. This might allow you to take advantage of a larger tax break available in 2021. If you have one qualifying dependent, you can spend up to $8,000 in daycare expenses while cutting your tax bill by $4,000. If you have more than one qualifying dependent, you can spend up to $16,000 in daycare expenses while cutting your tax bill by $8,000. To receive the full tax credit, your adjusted gross income must not exceed $125,000.

Contribute to an FSA or an HSA. Flexible spending accounts (FSA) and health savings accounts (HSA) allow you to pay medical and dental expenses with pre-tax dollars and reduce your tax liability. If you have an FSA, you can contribute up to $2,750 in 2021, and unspent funds in an FSA can now be rolled from 2021 to 2022. If you have an HSA, you can contribute up to $3,600 if you’re single and $7,200 if you’re married.

If you have questions about any of these tips, or if you need help with tax planning for 2021, please contact our office so we can help.

Advance Child Credit Payments Update

The American Rescue plan signed in March, 2021 requires the IRS to pay out one half of enhanced Child Tax Credits (CTC) to eligible taxpayers beginning this month. If you or someone you know have children, here’s what you need to know:

Current status

IRS web-sites. The IRS has created two web sites to help administer this program – one to help ensure you will get your Child Tax Credit if you are a non-filer, and another to opt out of the monthly payments. Both can be accessed on the IRS website at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

The monthly payments are automatic. Beginning mid-July you will begin receiving payments for one half of your projected 2021 Child Tax Credit if all of the following is true:

  • You filed a 2019 or 2020 tax return and claimed the credit or you gave information in 2020 to receive the Economic Impact Payment using the IRS non-filer tool.
  • The IRS thinks you are eligible.
  • You did not opt-out of the early payments.

Opting-out

Although most people who receive the CTC advance payments should accept and make use of them, there are some good reasons why some might want to opt of of the advance payments.

If you do not qualify for the credit. The IRS is using past tax returns to estimate who should get advance payments of this credit. Since they are using past data, they might sometimes be wrong. If your 2021 income is too high, you may need to pay back the advance payments when you file your tax return.

If you need the large credit. If you use this credit to balance out your year-end tax bill, you may find yourself owing money at the end of the year.

If your circumstances change. If your tax life changes, advance payments of the credit will complicate things. For example, if you are in the middle of a separation or divorce, the advanced payments could become a source of conflict.

Action to take

Look for notices. The IRS is sending out notices in the mail to those they think should receive the Advance Child Tax Credit payments. If you have not received one, the IRS may not think you should receive payments. But don’t worry, if you are owed the credit you will receive it when you file your tax 2021 tax return, even if you don’t receive advance payments.

Opt-out, if needed. If you do not want to receive the early Child Tax Credit payments, use the opt-out portal immediately to opt-out of the payments.

Keep track of payments. You will need to know how much you receive in advanced payments when you file your tax return next year. Do not assume the IRS is going to accurately keep track of this for you.

Tell your friends. Finally, remember that the Child Tax Credit is now a fully refundable credit. So if you know of anyone that does not pay income tax and has children, tell them. The new Child Tax Credit might help them make ends meet.

2020 Unemployment Compensation Refunds Are On Their Way

The American Rescue Plan Act of 2021 (ARPA) retroactively excluded up to $10,200 in unemployment compensation per taxpayer paid in 2020. Since this new law was signed after some tax returns had already been filed, some people who received unemployment compensation in 2020 paid too much tax and were due a refund. After the law was signed, the IRS quickly clarified that no action needed to be taken to claim these refunds. Any adjustments that were necessary would be handled automatically by the IRS.

So far, the IRS has identified 13 million taxpayers that may be eligible for some adjustment to their tax bill due to this issue. Some will receive refunds, which will be issued periodically through the summer, and some will have the overpayment applied to taxes due or other debts. For some there will be no change.

The IRS started issuing some refunds in early June, sending out more than 2.8 million refunds in the first week of June to those who were entitled to them, and then issued the next set of refunds in mid-June. The review of returns and processing corrections will continue during the summer as the IRS continues to review the simplest returns and then turns to more complex returns.

Affected taxpayers will receive letters from the IRS, generally within 30 days of the adjustment, informing them of what kind of adjustment was made (such as refund, payment of IRS debt payment or payment offset for other authorized debts) and the amount of the adjustment.

If you have questions about whether you are entitled to an adjustment to your tax due to this issue, or if you are confused by a letter that you received from the IRS, please contact our office so we can help.

Required Minimum Distributions in 2021

Tax-advantaged accounts like 401(k)s and IRAs are convenient ways to save for your retirement. These types of accounts allow to you defer paying taxes on the amount you save until you start withdrawing your savings. The government does want to see that tax revenue eventually, though.

To ensure that the government receives its share of tax revenue, these account include a feature called Required Minimum Distribution (or “RMD”). RMD is an amount that a saver is required to withdraw from a tax-advantaged retirement account (and pay tax on). The RMD for a saver changes each year, based on his or her age.

Here’s what you need to know about RMD in 2021, even if you’re not yet of retirement age:

RMD are back in effect in 2021. The required minimum distribution rules were suspended in 2020, as part of coronavirus relief. They are back in effect for 2021, so if you or a family member are affected by RMD rules, start making your plan now.

Penalties are high if you fail to take RMD. Rules require you to withdraw a certain amount of money every year from tax-deferred retirement plans like 401(k)s and traditional IRAs after you reach age 72, whether you want to or not. These withdrawals are then taxed as ordinary income. If you don’t follow these rules, the IRS can assess a penalty equal to 50 percent of the amount that should have been withdrawn, on top of the regular tax due.

Make a plan early. One of the biggest mistakes people make regarding RMD, is waiting until age 72 to start thinking about required distributions. Remember, you can start withdrawing funds from retirement accounts without penalty after you reach age 59½. If you start planning a tax-efficient withdrawal strategy before required distribution rules kick in, you can manage what tax rate will be applied to your retirement distributions.

Distribution amounts are based on several factors. How much you’re required to withdraw is based in part on the average life expectancy of someone your age. A calculation based on IRS life expectancy tables, plus your prior year retirement account balance, is used to determine your required withdrawals. The good news is that the financial institution handling your retirement account will usually do the calculation for you.

There are exceptions to distributions if you still work. If you reach age 72 and you’re still working for an employer providing you with a 401(k), you usually don’t have to take a distribution from that account as long as you don’t own 5 percent or more of the company. However, you still must take funds from other plans where you have assets.

Not all accounts require distributions. Not all retirement accounts require you to take a required minimum distribution. Roth IRA accounts, for example, avoid the minimum distribution requirement while giving you some extra flexibility to manage your other taxable withdrawals during retirement.

RMD rules can be confusing, and are a good example of why tax planning is such an important component of a retirement strategy. Please call if you have questions about any tax obligations related to your retirement accounts.

American Rescue Plan and the Child Tax Credit

The American Rescue Plan signed by President Biden in March 2021 made significant changes to the Child Tax Credit (CTC). These changes expand the CTC to cover roughly 39 million households, covering 88% of children in the United States, and make the CTC directly payable to eligible recipients on a monthly basis.

For tax year 2021, families claiming the CTC will receive up to $3,000 per qualifying child between the ages of 6 and 17. They will receive $3,600 per qualifying child under age 6. Under the prior law, the amount of the CTC was up to $2,000 per qualifying child under the age of 17.

The increased amounts are phased out for incomes over $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers.

Advance payments of the 2021 Child Tax Credit will be made from July through December to eligible taxpayers who have a main home in the United States for more than half the year. Eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above.

These changes to the Child Tax Credit are projected to lift more than five million children out of poverty this year, cutting child poverty by more than half.

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