While the tax deadlines are still months away, quarter four is the ideal time to start planning for your filings. The biggest questions taxpayers have going into the 2021 tax season involve the implications of Stimulus Payments and Child Tax Credits issued by the government as a part of the American Rescue Plan Act.
As you’re working through your 2021 Tax Returns, here is what you need to know about how stimulus payments will impact you.
Economic Impact Payments and Child Tax Credits
In March of 2021, Congress passed the American Rescue Plan Act which included a third round of Economic Impact Payments and additional stimulus funds for families with children. Similar to the first two rounds of Economic Impact Payments, the third check offered lump sum payments to eligible Americans.
The Advance Child Tax Credit was issued based on a person’s 2020 tax return and payments are issued via direct deposit on July 15, August 13, September 15, October 15, November 15, and December 15.
Will I have to pay taxes on funds received through Stimulus Payments?
In short, no, you will not have to pay income tax on your third stimulus payment in 2021.
Your third stimulus payment will not be a part of gross income and will not be taxable; however, it should be reported for purposes of qualifying for the Recovery Rebate Credit. These payments are essentially grants, not to be taxed by the government.
Only in extreme situations would they need to be repaid back (i.e., the recipient passed away).
Will I have to pay taxes on funds received through the Advanced Child Tax Credit?
The Child Tax Credit included in the 2021 Rescue Plan Act is considered an Advance on your 2021 tax return, not a stimulus payment.
The Child Tax Credit is based on a number of factors that can change from year to year, including income, filing status, and the number of qualifying children. To determine your Advance Child Tax Credit payment, the IRS used one of three sources of information:
- Your 2020 tax year return
- If your 2020 tax year return was not filed, then your 2019 tax year return
- If you used the Child Tax Credit Update Portal in 2021 to update the IRS with changes to your income, filing status, or number of qualifying children, the IRS used this 2021 update.
Since the advance credits are based on an estimation, if your 2021 tax year return shows factors that would qualify you for a smaller total child tax credit than what was issued, you will have to reconcile the payment in your return.
Factors that may cause a change in the amount you should have received include:
- A large increase in income
- A smaller number of qualifying children
- A change in filing status
Any excess of advances will be repaid back; any excess of credit will be added to your refund.
You may qualify for repayment protection which will negate the repayment of excess advances if your modified adjusted gross income (MAGI) in 2021 is no more than the following amounts:
- $60,000 and filing status is married filing joint or qualifying widow(er)
- $50,000 and filing status is head of household
- $40,000 and filing status is single or married filing separately
What documentation do I need for tax purposes?
As you prepare your 2021 Tax Return, here are a few of the documents you will want to have on hand, as they relate to Economic Impact Payments and the Child Tax Credit.
This is the notice you received with the third stimulus payment. If you did not keep the notice you received with the third stimulus payment (or did not receive one), you can create an online account at irs.gov > View Your Account > Log in to your Online Account > Create Account.
This will show your official record of Stimulus Payments received in 2021.
Keep a copy of your bank statement on hand that reflects receipt of the third stimulus payment as a direct deposit.
The bank memo line may mention “EIP3”.
Keep your eyes open for a letter from the IRS in January 2022. They will be issuing Letter 6419 which documents the total amount of the Child Tax Credit Payments you received.
You will need the amount listed on the letter to reconcile the eligible Child Tax Credit with the payments you received in 2021.
What do I do if I did not receive my stimulus payments?
Use the “Get My Payment” tool on irs.gov to determine if you were eligible for a payment.
If you were but did not receive one, you should request a payment trace to track the payment by calling 800-919-9835 or completing and mailing Form 3911 to the IRS.
Who is eligible to claim the 2021 Recovery Rebate Credit on their 2021 return?
If you did not receive as much of a third stimulus check as you were truly eligible, you can claim the 2021 Recovery Rebate credit on your 2021 return. There are a variety of reasons you may have received less than you were owed, including:
- an increase in dependents
- a decrease in income
- a change in filing status
For example, single filers with an Adjusted Gross Income (AGI) of at least $80,000 on their 2020 return ($120,000 for head of household, $160,000 for married filing jointly) did not receive a third stimulus check in 2021. If the person’s 2021 income fell below $80,000 ($120,000 for head of household, $160,000 for married filing jointly), or experienced an increase in dependents, such as aging/disabled relatives or adult children moving back in, they should claim the 2021 Recovery Rebate Credit.
Self-Employment Tax Credits for 2021
If you are self-employed and experienced any of the following situations that prevented you from working, you may be eligible for the same Credits for Sick Leave and Family Leave as many conventional employees are by filing Form 7202 with your personal return.
- You spent time away from work to get a COVID-19 vaccine
- You spent time away from work to recover from complications of a COVID-19 vaccine
- You spent time away from work to await the results of a COVID-19 test or diagnosis
Tax Planning Tips for 2021
Tax policy is an instrument of politics; as administrations and landscapes change, so do the tax laws. Planning your affairs in a way to minimize taxes is a healthy part of your financial well-being. As you prepare to file your 2021 Tax Return, here are a few tips.
2020 and 2021 brought many changes, and that includes changes in income levels, tax implications, and more. Start your tax planning early to give yourself enough time to gather appropriate documentation and file for any and all tax benefits you are due.
Research Tax Credits
There are a variety of circumstances at play that may change your filing status and opportunities for tax credits. Take time to identify the appropriate opportunities to decrease your tax liability, within the framework of existing legislation.
Partner with a Professional
While taxes aren’t your area of expertise, they are ours. Working with a professional minimizes the potential for mistakes. Our team of tax professionals ensures you don’t miss deductions or make careless errors on your filings that may lead to penalties, interest, and unwanted love letters from the IRS and state agencies.
At SME, CPAs, our tax preparation process is quick and easy, offering digital solutions for a hands-off tax filing. But our experience doesn’t stop there. Working with a tax professional year-round ensures tax compliance throughout the year and gives your tax professional an inside look at the best opportunities to maximize your return to benefit you.
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