By: Rebecca G. M. Krehbiel
Things to Keep in Mind for 2021 Tax Filing
While filing season is well under way for tax year 2021, it is important to keep in mind some of the issues specific to the 2021 tax year and some items that have been carried over from relief packages passed for tax year 2020. A few key issues are discussed below.
Return Processing. As the IRS continues to struggle with staffing and processing issues, return processing for tax year 2021 will continue to be extremely slow. If possible, taxpayers should e-file their returns, pay electronically, and set refunds up for direct deposits to avoid some of the significant delays and processing issues that have plagued taxpayers since the start of the pandemic.
Virtual Currency. This year, taxpayers must answer the following question on the first page of their income tax return: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” The instructions to the Form 1040 clarify that if your only transaction involving virtual currency in 2021 was the purchase of virtual currency for real currency, you are not required to check “yes”. If you sold, exchanged, or transferred virtual currency, it must be reported as a disposition of a capital asset and gain or loss must be reported on Schedule D of the Form 1040. New reporting requirements for digital assets will be effective for transactions occurring in 2023, reportable on income tax returns filed in 2024.
Charitable Deduction. The above the line charitable deduction of $300 for individuals or $600 for married couple filing jointly is still available for tax year 2021. This above the line deduction is available to taxpayers even if they do not itemize their deductions. Additionally, taxpayers who itemize their deductions may take a charitable deduction up to 100% of their AGI for 2021 contributions (prior to 2020, the deduction was limited to between 20% and 60% of AGI depending on the type of contribution and type of charity). The 100% limit for 2021 is not automatic, but the taxpayer may elect it for qualified cash contributions to charities during 2021 if they do not want the pre-2020 limits to apply.
Education Expenses. The tuition and fees deduction, which allowed for a deduction up to $4,000 for qualifying tuition expenses below certain income thresholds, is not available in 2021. Income limitations for the Lifetime Learning Credit, however, have increased. The phaseout for the Lifetime Learning Credit now ranges between $80,000 and $90,000 for single individuals ($160,000 to $180,000 for married couples filing jointly). This is up from the previous range of $59,000 to $69,000 for single filers and $118,000 to $138,000 for married couples filing jointly.
Unemployment Compensation. Unlike in 2020, unemployment income is fully taxable for tax year 2021 as if it were wages.
Economic Impact Payment and Recovery Rebate Credit. If a taxpayer received an Economic Impact Payment in 2021, it is not considered taxable income but will reduce eligibility for the 2021 Recovery Rebate Credit. If a taxpayer was not eligible for an Economic Impact Payment, he or she may still be eligible for the Recovery Rebate Credit as it’s based on 2021 income thresholds (phaseout begins at $73,000 for individuals and $150,000 for married couples filing jointly). For example, a taxpayer may have been ineligible for the Economic Impact Payment in 2020 but a change in income or dependents may make the taxpayer eligible in 2021 for the Recovery Rebate Credit.
Dependent Care Assistance and Child Tax Credit Enhancement. Qualifying expenses for dependent care assistance increased in 2021 to $8,000 for one child and $16,000 for two children. Additionally, it was made refundable for certain taxpayers. For taxpayers whose employers provide dependent care FSAs, the limit increased to $10,500 in 2021 and employers could opt to allow employees to carry over the entire 2021 balance to 2022 and provide a 12-month grace period to use the funds. Additionally, the child tax credit was enhanced in 2021, so taxpayers can receive an enhanced credit of $3,600 for children under 6, and $3,000 for children age 6 through 17 if below certain income thresholds.
Employee Retention Credit. While not applicable for individual income tax returns, for employers, the Employee Retention Credit is still available to claim in 2021, although there continue to be issues in calculating it based on changing IRS guidance. The amount of the credit, if eligible, is 70% of the first $10,000 of qualified wages per employee in each qualifying quarter (maximum of $7,000 per employee per quarter). To claim the credit, generally, a business must have experienced more than a 20% decline in gross receipts compared to the same quarterly period of 2019. If not in existence in 2019, a new business may substitute the corresponding quarter of 2020.