As tax preparers, you are responsible for calculating, preparing and filing income taxes on behalf of our clients. To support this responsibility, you should also be aware of the different changes made by our government regarding other tax laws.
The Income Threshold Increase
If your investment income exceeded the annual limit, you could not claim the EITC, historically speaking. In 2021, the limit was increased significantly. From $3,650 in 20210 to $10,000 in 2021. This will make investment incomes’ limit to be raised annually. You can check on your software for tax preparers to assist you.
Married but Separated and Filing Separately
Another change broadens eligibility for married people divorced from their spouse and file separate tax returns. They must have lived with a qualifying child for at least six months of the year, but they are not required to claim the child on their tax return.
Previously, a taxpayer had to have a qualifying child and have lived apart from their spouse for at least six months if they were married filing separately. However, changes have been made, they can qualify even if they have not lived separately for up to six months if they are under a separation instrument They may still be eligible if separated and do not share their current residence with their spouse.
Changes in Using Prior Year Income
If their 2019 income was more significant than their 2021 income, taxpayers in 2021 could still claim the EITC based on their 2019 income. However, they cannot use their 2020 earnings for filing.
Changes in the Child Tax Credit
The 2021 Child Tax Credit has received a lot of attention in the media because of the new advance payments, but it has also changed significantly in other ways.
The Child Tax Credit is now refundable to $1,400 per child, with a phase-out at $400,000 in income for married couples and $200,000 for single filers. The refundable amount is calculated as 15 percent of earned income over $3,000.
Changes in the Recovery Rebate Credit
In 2020, the Recovery Rebate Credit was introduced, allowing taxpayers who had not previously received stimulus payments to claim them as a refundable tax credit. In connection with the third round of stimulus payments, which began in April, some of your clients may be eligible for a recovery rebate credit in 2021.
Depending on the taxpayer’s filing status, the Recovery Rebate Credit can be worth up to 35 percent of their earned income in 2019, with a maximum credit of $1,400 for a single tax return and $3,000 for joint returns.
Changes in the Earned Income Requirements
In 2021, the earned income requirements will be removed entirely. To be eligible for the CTC, taxpayers no longer need to have earned income or any income at all. After that, they will receive the maximum $3,000 credit every year, regardless of income.
In essence, it will no longer be a work credit. Instead, lawmakers hope that the refundable credit will replace the EITC, making the income tax code fairer and more progressive.
Increased Maximum Benefits and Income
Individuals will receive up to $1,502 in benefits in 2021, up from $538 in 2020. Individuals’ maximum income will be $21,430 in 2021, up from $15,820 in 2020.
Conclusion
Keeping up with changes to the tax code for 2021 has not been an easy task. Significant changes are made to several areas of tax law, most notably refundable tax credits.
Maintain an eye out for changes to the various regulations and incorporate them into your clients’ returns. You can look up the best professional tax software to optimize your business. Keystone Tax Solutions is the industry’s leading professional tax preparation software for you and your clients. Contact us and learn more.
