Below is a tax update of the most common changes and information to know for filing your 2021 individual tax returns in 2022. As of time of publication, the IRS has not finalized the 2021 Form 1040 or Schedules 1, 2 and 3 that support Form 1040, thus more changes (most likely slight changes) are possible.
- Advance Payments of Child Tax Credit
- Cash Charitable Contributions
- Child and Dependent Care Credit
- Economic Impact Payments (Stimulus Payments)
- Inflationary Adjustments for 2021
- Required Minimum Distributions (RMDS)
- Unemployment Compensation
- Virtual Currency
- Future Tax Updates and Alerts
Advance Payments of Child Tax Credit
Those taxpayers who have been receiving monthly Advance Child Tax Credit payments will receive Letter 6419 from the IRS showing the total payments received for 2021.1 It is very important to give your tax preparer a copy of Letter 6419 so they can reconcile your payments with the remaining child tax credits on your 2021 tax return.
These advance monthly payments of Child Tax Credit are only half the expected Child Tax Credit for 2021 based on your income, filing status, and dependent ages. The remaining Child Tax Credit can be claimed in 2022 when you file your 2021 tax return.2
Cash Charitable Contributions
For tax year 2020, as part of the CARES Act, those taxpayer(s) who could not benefit from itemizing deductions on their federal tax return, could take up to a $300 deduction for cash donations made to qualifying organizations.
There are two changes to this for tax year 2021
- Married Filing Joint filers can now take up to a $600 deduction for qualified cash donations. For all other filing statuses, the maximum deduction is $300.
- In 2020, this was an Above-The-Line-Deduction, meaning the Charitable Contributions of $300 taken in 2020 on Form 1040 actually lowered your Adjusted Gross Income (AGI). For 2021 this deduction has been moved on the Form 1040 and Cash Charitable Contributions will not lower your Adjusted Gross Income for 2021.
Child and Dependent Care Credit
In 2020, this non-refundable credit was worth from 20% to 35% of up to $3,000 in eligible dependent care expenses for children under age 13 or up to $6,000 for two or more children under age 13 (also includes qualified disabled dependents).
In 2021, this is a fully refundable credit. The credit percentages of “20% to 35%” have changed to “35% to 50%” and the credit is allowed for up to $8,000 (instead of $3,000) for one under 13 child or disabled person and $16,000 for two or more.3
The adjusted gross income (AGI) level for this credit has also been raised to $125,000 and phases out from there. So, taxpayers who previously did not qualify for this credit because of their income level could very well qualify in 2021 and be refunded up to $4,000 of dependent care expenses for one child under age 13 at the time care was given and up to $8,000 for two or more.
Economic Impact Payments (Stimulus Payments)
In 2021, tax filers and preparers need to know how much they received in Economic Impact Payments for Rounds 1 and 2 for the preparation and filing of their 2020 tax returns.
In 2022, to file your 2021 tax return, we will need to know how much you received for the 3rd round of Economic Impact Payments. These payments started being distributed in March 21 and consisted of $1,400 for eligible individuals (U.S. citizens and incomes below $160,000 (Married Filing Joint), $120,000 (Head of Household) or $75,000 (filing status Single, Married Filing Separate)).4
The IRS will be sending out Letter 6475 showing how much you received for the 3rd round of stimulus. Be ready to give your tax preparer a copy of this letter for the preparation of your 2021 tax returns. If you cannot find this letter, please check bank records/statements to confirm the amount received.
If you did not receive the 3rd Round of Economic Impact Payments or might be entitled to more due to lower income in 2021 than in 2020 or if you have a new family member, i.e., birth of a child, the additional stimulus payment you are entitled to can be claimed on your 2021 tax return as the Recovery Rebate Credit.
Inflationary Adjustments for 2021
- Standard Deduction increased for all filing statuses: Single & Married Filing Separate is $12,550; Head of Household is $18,800 and Married Filing Joint is $25,100.
- Business Mileage Rate increases from 56 cents a mile in 2021 to 58.5 cents a mile for 2022. Medical mileage increases from 16 cents a mile to 18 cents and charitable mileage remains the same at 14 cents a mile.
- Annual exclusion for gifts remains at $15,000.
- Traditional & Roth IRA Contribution Limits: $6,000 ($7,000 if you’re age 50 or older). This remains unchanged from 2020 and are the same limits have been set for 2022.
Required Minimum Distributions (RMDs)
Required Minimum Distributions (RMDs). Taxpayers were allowed to skip RMDs in 2020 but for 2021 anyone who is at least 72 years old by 31 December 2021 are required to take RMDs for 2021. The penalty for not taking a RMD can be 50% of the amount of the Required Minimum Distribution.
Example: If you were required to take $20,000 in RMDs in 2021, the penalty for not taking those distributions can be $10,000.
In 2020, up to $10,200 of your Unemployment Compensation could be excluded from taxable income. There is no such deduction for tax year 2021.
In 2020, Form 1040 had the question “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
For the 2021 tax year, it is being proposed to reword the question to “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
An important note, the word “acquire” will likely be replaced with “dispose of”.
Buying virtual currency (cryptocurrency) is not in itself a reportable and taxable event. If all you did in 2021 was buy virtual currency with dollars from your checking, savings and/or money market account then you would answer “No” to this question.
But, if for example you used Bitcoin to buy another virtual currency, then this is a reportable event, and you will need to answer “Yes” to this question.
If you otherwise are awarded or receive cryptocurrency for free, i.e. Coinbase awarded you free tokens based on your purchasing activity, this would be a reportable event and you would answer “Yes” to the question.
Future Tax Updates and Alerts
If Congress issues any new legislation or if the IRS issues any new regulations reflecting any of the above items for tax year 2021, we will update this post instead or publish a new post if information is very detailed. So, if you subscribe to our Tax Updates/Alerts, you’ll be notified of any changes.