Tax season officially started on January 24, 2022. The IRS shuts down their e-filing system at the end of each year to do annual maintenance so the 24th is the first day the IRS is accepting 2021 individual tax returns. The business tax season started earlier in the year on January 7th but received less attention than the opening of the individual tax season. So regardless of whether you need to file business tax returns, or individual tax returns, the IRS is accepting them.
Now that tax season is here, I wanted to discuss some important things that you should know. The last few years have brought us a staggering amount of tax law changes. We were all anxiously awaiting the outcome of Biden’s Build Back Better plan, but that has been placed on hold as opposition in the Senate halted the progress of the plan despite a bill being passed in the House. Needless to say, taxpayers and tax practitioners alike have had to stay on their toes. Here are some highlights that you should be aware of whether you are brave enough to tackle your tax returns on your own or have a professional helping you out.
Economic Impact Payments and Recovery Rebate Tax Credits
In response to the COVID-19 pandemic, there have been three rounds of Economic Impact Payments distributed to American taxpayers. The first was a payment of $1,200 to each taxpayer, spouse, and $500 for each qualifying dependent. The second was a payment of $600 to each taxpayer, spouse, and qualifying dependent. The third was a payment of $1,400 to each taxpayer, spouse, and qualifying dependent. There were income thresholds that may have reduced or eliminated these payments. If either of the first two payments should have been paid, but were not, a Recovery Rebate Credit could have been claimed on your 2020 tax return. If the third payment was not received, a Recovery Rebate Credit can be claimed on your 2021 tax return.
To find the amount of the third payment, you can create an online account on IRS.gov or refer to IRS Notice 1444-C which the IRS mailed after sending the payment. The IRS is also sending Letter 6475 beginning in late January 2022 to confirm the total amount of the third payment and any plus-up payments issued for tax year 2021.
It is very important to claim the correct amount of Recovery Rebate Credit on your tax return. If there are discrepancies between your records and the IRS’s, the IRS will flag your tax return. This could hold up any refunds you expect to receive as an IRS agent takes months to review your tax return.
Increased and Advanced Child Tax Credit
The American Rescue Plan Act expanded and allowed for an advance of the Child Tax Credit. In 2021 the credit temporarily increased to $3,000 for each qualifying child 6-17 years old and $3,600 for each qualifying child under the age of 6. There are income thresholds that could reduce or eliminate the credit.
In July the IRS began sending advance Child Tax Credit payments of up to 50% of the amount of the credit. Anyone who did not opt out would have received these payments automatically. These advance payments will reduce the amount of the credit claimed on your tax return. The IRS is sending out Letter 6419 which will state the amount of the credit payments received. You will need to reconcile the amount received against the Child Tax Credit you are eligible to claim. If you received less than you should have, you are eligible for an additional credit. If you received more than you should have, you will be responsible for repaying the overpayment.
Child and Dependent Care Credit
There is an increase in the amount of the Child and Dependent Care Credit for 2021 only. The top credit for qualifying expenses increased from 35% to 50% meaning you could get a maximum credit of $4,000 for one child or $8,000 for two or more children. Remember this credit is for working parents who hire someone to watch their children while they are at work. Hiring a babysitter for date night does not count. There are income thresholds that may limit the amount you can claim.
For those who claimed the standard deduction in 2020 there was an additional deduction on page one for cash contributions to charities. The limit for 2021 is $600, up from $300 in 2020. Remember these are cash contributions. You can continue to deduct your noncash contributions as an itemized deduction on Schedule A.
Retirement Account Distributions
Many of the relief provisions for retirement account distributions have gone away. Required minimum distributions are back for those who are 72 or older. Early distributions are subject to the 10% early withdrawal penalty. For those who took early distributions due to COVID and opted to spread them out over three years, remember you will be taxed on one third of the distribution on your 2021 tax return, and another third on your 2022 tax return.
For all the business owners and rental property owners, remember that business meals purchased at a restaurant are 100% deductible on your 2021 and 2022 tax returns. All other business meals are still 50% deductible. Entertainment expenses like tickets to sporting events are still nondeductible.
The Infrastructure Investment and Jobs Act eliminates employee retention credits for wages paid after September 30, 2021.
The deduction for aggregate business losses for 2021 returns to the $500,000 limit. Net Operating Losses (NOL) are carried forward at 80% beginning in 2021.
Currently Proposition 208 requires individuals with taxable income of more than $250,000 (single and married filing separate) and more than $500,000 (married filing joint and head of household) to pay an additional tax surcharge.
There is a new small business income tax of 3.5%. Individuals may elect to report their small business income on Arizona Form 140-SBI for the small business income included on their federal adjusted gross income. The SBI tax return is filed with the regular tax return. Small businesses owners should calculate whether it makes sense to file this additional form.
The benefits, annuities, and pensions as retired or retainer pay of the uniformed services are no longer taxable in Arizona. This is a 100% subtraction compared to the $3,500 subtraction in years past.
If you had no desire to read any of this and you want someone else to handle your taxes for you, call or text me at (480) 626-5557 or send an email to firstname.lastname@example.org. I have more than 10 years of experience preparing tax returns and assisting individuals and businesses in the real estate industry.
David J. Hawks, CPA, EA