Tax Alert ACTC
Recently, IRS Commissioner Charles Rettig stated that taxpayers should not file their 2021 return until the Additional Child Tax Credit (ACTC) has been reconciled with the IRS Letter 6419 (estimated mailing date January 21, 2022) sent to the taxpayer or using IRS Transcript data.
Over 10 million 2019 tax returns were held for manual processing, causing an enormous backlog and delayed refunds. The IRS does not want this to happen again. Taxpayers may also be leaving money on the table if they do not reconcile their Economic Impact Payments (EIP).
Don't hesitate to contact Croft and Frost Tax Resolution at taxresolution@frostcpas.com.
On March 11, 2021, President Biden signed the American Rescue Plan Act into law. The IRS began implementing plans for the newly enacted American Rescue Plan Act of 2021. The Act applies retroactively to tax the year 2020.
The Act includes additional information about taxpayers' third round of stimulus payments. The Act provides a $1,400 stimulus payment. The payment essentially is a credit against 2021 taxes but is fully refundable and could be paid in advance like last year.
New provisions:
Unemployment Compensation:
Up to $10,200 is not included in gross income per person. If filing married filed jointly, it is excludable for each spouse subject to limitations. The Act is retroactive to the tax year 2020.
Caution: The IRS strongly urges taxpayers not to file amended returns related to the new legislative provisions or take other unnecessary steps at this time. The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable.
For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes that they should not file an amended return at this time until the IRS issues additional guidance.
Advance Premium Tax Credits (1095-A Advance Premiums to Marketplace Insurance providers):
Repayments for excess Advance Premium Tax Credit are suspended.
Recovery Rebate Credit: (subject to phaseout limitations)
$1,400 per individual except for non-resident aliens, dependents reported on another tax return, and estate and trust.
$1,400 for all dependents
Must have a social security number
Reconciled on the 2021 tax return
It was based on 2019 tax year filing unless the 2020 tax return is filed.
Single and Married Filing Separate filers phaseout begins at $75,000 and no credit if income exceeds $80,000.
Head of household filers phaseout begins at $112,500 and no credit if income exceeds $120,000
Married filing joint and qualified widow filers phaseout begin at $150,000 and no credit if income exceeds $160,000.
Child Tax Credit for 2021 Special Rules (subject to phaseouts)
Fully refundable
A qualifying child age has been expanded to 17 years old.
Credit increased to $3,000 ($3,600 for children between 0 to 5 years old) per qualifying child.
Phaseout threshold increased in 2021 for single and married filing separate filers to $75,000, head of household filers to $112,500, and married filing joint and qualified widow filers to $150,000. There is a $50 reduction in the refundable credit for every $1,000 over the threshold.
Advance payment of the child tax credit: (subject to phaseouts)
From July 2021 to December 2021, taxpayers can receive monthly payments for 1/12 of the estimated child tax credit. The advance payments are reconciled on the 2021 tax return. For taxpayers eligible to receive advance child tax credits, IRS sends out a statement on payment amounts no later than January 31 of the subsequent year.
For more information on Advance Child Tax Credit payments, please go to the IRS website https://www.irs.gov/credits-deductions/advance-child-tax-credit-eligibility-assistant.
The taxpayer must repay the excess advance payments unless you qualify for safe harbor.
The phaseout for single and married filing separate filers no repayment, if modified, adjusted gross income is below $40,000 full repayment when modified adjusted gross income is greater or equal to $80,000.
The phaseout for the head of household filers no repayment, if modified, adjusted gross income is below $50,000, and full repayment when modified adjusted gross income is greater or equal to $100,000.
The phaseout for married filing joint and qualified widow filers no repayment, if modified, adjusted gross income is below $60,000, and full repayment, when modified adjusted gross income, is greater or equal to $120,000.
Earned Income Credit:
Special rule for 2021 there is a decrease in minimum age from 25 to applicable minimum age. The applicable minimum age is 19, specified student aged 24 and qualified former foster youth, and eligible homeless youth age 18. The earned income tax credit maximum age of 65 is eliminated in the tax year 2021.
The 2021 special rules for the earned income tax credit increase the credit amounts and phaseouts. The increase in earned income raised from $4,220 to $9,820, and the phaseout amounts increased from $5,280 to $11,160.
Investment income:
The limit on investment income increased from $3,650 to $10,000 indexed for inflation beginning after December 31, 2020. Taxpayers could only use 2019 earned income to compute 2021 earned income credit if 2019 earned income exceeds the current income.
Child and dependent care credit:
The child and dependent care tax credit is a refundable credit. Eligible dependent care expenses increased from $3,000 to $8,000 for one qualifying child and $6,000 to $16,000 for two or more qualifying children.
Student loan forgiveness:
Student loan forgiveness is not included in gross income for 2021 to 2025. This rule pertains to partial and full discharge of loans.
Form 1099-K:
IRS Reporting threshold lowered for payment settlement organizations that issue Form 1099-K. The payment threshold is lowered to $600 or more in aggregate payments made during the year. This change is for tax years after December 31, 2021. Third-party transactions include transactions for goods and services.
Sick and family leave:
Credits extended from April 1, 2021, to September 30, 2021, allows paid leave credits for Covid19 Vaccine, and the credits are available to 501(c)(1) government organizations.
The special rule announces paid sick leave 10-day limitation resets on April 1, 2021. The rule increased the aggregate paid family leave limit of $12,000.
Self-employed individuals for 2021 are eligible for paid sick and family leave credit even if already qualified in 2020.
For more information on Employee Retentions Credit, Restaurant Revitalization Grants, and IRC 461 Excess Business Loss Limitation extended through 2027, contact Croft and Frost Certified Public Accountants and Enrolled Agents to set up an appointment.
By: Mitch Desbiens, MBA, EA, Tax Resolution at CROFT & FROST