FS-2022-10, February 2022 Expanded tax credits for families, a deduction for non-itemizers who give to charity and a higher limit for itemizers who give to charity are among the American Rescue Plan changes that taxpayers will see on their 2021 federal income tax return. This is a year when many people who don't normally need to file a return should consider filing so they can take advantage of such expanded benefits as the Recovery Rebate Credit, Child Tax Credit, Credit for Child and Dependent Care Expenses and Earned Income Tax Credit. Because these expanded benefits will mean larger refunds for many people, be sure to file an accurate return electronically and choose direct deposit to avoid processing delays and speed delivery of a refund. Special alert for parents of children born in 2021 and for families who added a new dependent in 2021: Parents of a child born in 2021 who claim the child as a dependent on their 2021 income tax return may be eligible to receive a 2021 Recovery Rebate Credit of up to $1,400 for this child. All eligible parents of qualifying children born or welcomed through adoption or foster care in 2021 are also encouraged to claim the Child Tax Credit – worth up to $3,600 per child born in 2021 – on their 2021 income tax return. Families who added a dependent – such as a parent, a nephew or niece, or a grandchild – on their 2021 income tax return who was not listed as a dependent on their 2020 income tax return may be eligible to receive a 2021 Recovery Rebate Credit of up to $1,400 for this dependent. Here is a rundown of some of the key changes. Missed out on stimulus payment? Claim Recovery Rebate Credit Eligible people who didn't receive the third round of Economic Impact Payments, also known as stimulus payments, or who didn't receive the full amount, may claim the Recovery Rebate Credit (RRC) when they file. The law included a third round of Economic Impact Payments (EIP3) that went out to eligible Americans, throughout 2021. These payments were generally equal to $1,400 per person. In most cases, that means a family of four received a total payment of $5,600. Many people whose initial payment was less than the full amount also received a "plus-up" payment. Typically, this happened where they filed a 2020 return and information on that return indicated that they qualified for a larger payment than the amount originally estimated by the IRS. Any third Economic Impact Payments issued will reduce the amount of the credit for which a person is eligible. Individuals will need the total amount of their third Economic Impact Payment and any plus-up payments to claim the 2021 Recovery Rebate Credit and avoid a processing delay that can slow a tax refund. Individuals can use IRS Online Account to see the total amount of their third Economic Impact Payment under the related tax year tab. Now through March, the IRS is also sending Letter 6475 to each person who received the initial EIP3, a plus-up payment, or both. Married spouses who received joint payments will need to log into their own Online Account or review their own letter for their portion of the total payment. Recipients must use the information to figure their RRC. Filing electronically and tax preparation software will help individuals figure their Recovery Rebate Credit. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if they're eligible for the credit. For more information, visit IRS.gov/rrc. Expanded Child Tax Credit for 2021 The American Rescue Plan increased the amount of the Child Tax Credit (CTC), made it available for 17-year-old dependents, made it fully refundable for most families and made it possible for families to receive up to half of it, in advance, in monthly payments during the last half of 2021. Moreover, families can get the credit, even if they have little or no income from a job, business or other source. To get the CTC, eligible families must file a return, even if they received monthly payments. In addition, everyone must attach Schedule 8812 to their return. Before 2021, the credit was worth up to $2,000 per eligible child. The law increased it to as much as $3,000 per child for dependents ages 6 through 17, and $3,600 for dependents ages 5 and under. The maximum credit is available to taxpayers with a modified adjusted gross income (AGI) of: $75,000 or less for singles, $112,500 or less for heads of household and $150,000 or less for married couples filing a joint return and qualified widows and widowers. Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every $1,000 in modified AGI. For families living in the United States, the credit is fully refundable and is called the Refundable Child Tax Credit (RCTC). This means that an eligible family can get it, even if they owe no federal income tax. To get the RCTC, the taxpayer's main home must be in the U.S. for more than half of 2021. Members of the military meet this requirement, even if they are stationed abroad. Before 2021, the refundable portion, known as the Additional Child Tax Credit (ACTC), was limited to $1,400 per child. In 2021, the $1,400 ACTC limit generally continues to apply to Americans abroad — that is, taxpayers who did not have a main home in the U.S. In addition, by law, the IRS must wait until after Feb. 15 to issue refunds to early filers claiming the ACTC or the Earned Income Tax Credit (EITC). Repaying advance payments People who didn't qualify for the CTC in 2021 but received advance payments may have to repay part or all of them. But low- and moderate-income taxpayers are generally protected from this repayment requirement. Repayment protection is limited to $2,000 per child. No repayment is required for taxpayers whose modified adjusted gross income is at or below: Married filing jointly and qualified widows and widowers: $60,000; Head of household: $50,000; Everyone else: $40,000. Because, by law, repayment protection is phased out above these income levels, for those with higher incomes full or partial repayment is required. Full repayment is required for taxpayers whose modified AGI is at or above: Married filing jointly and qualified widows and widowers: $120,000; Head of household: $100,000; Everyone else: $80,000. Use Schedule 8812 to report the repayment or determine whether the repayment protection applies. This is also the form to use to claim the CTC and report any advance payments of the CTC. To help ensure that this form is filled out correctly, anyone who received advance payments of the credit during 2021 should be sure to have at hand a copy of Letter 6419 they received from the IRS. Child and dependent care credit increased for 2021 The American Rescue Plan increased the amount of the credit and eligible expenses for child and dependent care, modified the phase-out of the credit for higher earners and made it refundable. For 2021, the top credit percentage of qualifying expenses increased from 35% to 50%. In addition, eligible taxpayers can claim qualifying child and dependent care expenses of up to: $8,000 for one qualifying child or dependent, up from $3,000 in prior years, or $16,000 for two or more qualifying dependents, up from $6,000 before 2021. This means that the maximum credit in 2021 of 50% for one dependent's qualifying expenses is $4,000, or $8,000 for two or more dependents. When figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending arrangement (FSA), must be subtracted from total eligible expenses. As before, the more a taxpayer earns, the lower the credit percentage. But under the new law, more people will qualify for the new maximum 50% credit rate. That's because the adjusted gross income level at which the credit percentage is reduced is raised substantially from $15,000 to $125,000. AGI is the amount shown on Forms 1040 and 1040-SR, Line 11. Above $125,000, the 50% credit percentage is reduced as income rises, plateauing at a 20% rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20% until reaching $400,000 and is then phased out above that level. It is completely unavailable for any taxpayer with AGI at or above $438,000. In 2021, for the first time, the credit is fully refundable. The credit is claimed on Form 2441. Also, see Publication 503 for details. Childless EITC expanded for 2021 For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit, a fully refundable tax benefit that helps many low- and moderate-income workers and working families. That's because the maximum credit is nearly tripled for these taxpayers and is, for the first time, made available to both younger workers and senior citizens. In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Homeless youth and former foster youth may qualify if they are at least age 18. On the other hand, students under age 24 usually don't qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64. Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit. EITC changes for both 2021 and future years Changes expanding the EITC for 2021 and future years include: Singles and couples who have Social Security numbers can claim the credit, even if their children don't have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn't qualify for the credit. More workers and working families who also have investment income can get the credit. Starting in 2021, the limit on investment income is increased to $10,000. After 2021, the $10,000 limit is indexed for inflation, with the 2022 limit rising to $10,300. Before 2021, the limit was $3,650. Married but Separated spouses can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for the last six months of the year and must have a qualifying child living with them for more than half the year. For more information about the EITC, visit IRS.gov/eitc or see Publication 596, Earned Income Credit. Charity deduction for people who take the standard deduction A temporary law change allows more taxpayers to easily deduct up to $600 in cash donations to qualifying charities on their 2021 federal income tax return. Cash contributions include those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with their volunteer services to a qualifying charitable organization. Cash contributions don't include the value of volunteer services, securities, household items or other property. Ordinarily, people who choose to take the standard deduction cannot claim a deduction for their charitable contributions. Nearly nine in 10 taxpayers now take the standard deduction, rather than itemizing their deductions. Individual tax filers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married couples filing a joint return. The deduction is claimed on Forms 1040 and 1040-SR, Line 12b. Though cash contributions to most charitable organizations qualify, contributions made either to supporting organizations or to establish or maintain a donor advised fund do not. Contributions carried forward from prior years do not qualify, nor do contributions to most private foundations and most cash contributions to charitable remainder trusts. In general, a donor-advised fund is a fund or account maintained by a charity in which a donor can, because of being a donor, advise the fund on how to distribute or invest amounts contributed by the donor and held in the fund. A supporting organization is a charity that carries out its exempt purposes by supporting other exempt organizations, usually other public charities. Special recordkeeping rules apply to any taxpayer claiming a charitable contribution deduction. Usually, this includes obtaining an acknowledgment letter from the charity before filing a return and retaining a cancelled check or credit card receipt for contributions of cash. For details on the recordkeeping rules for gifts to charity, see Publication 526, Charitable Contributions, available on IRS.gov. Itemizers can choose 100% limit on eligible cash contributions Taxpayers who itemize their deductions and made large cash contributions during 2021 may be able to deduct those contributions, up to 100% of their adjusted gross income. The usual limit is 60% of AGI. The guidelines for qualifying contributions are similar to those for the charitable contribution deduction for people who take the standard deduction. Special rules apply to choosing and calculating this higher limit. For details, including worksheets and examples, see Publication 526. Other tax changes Other changes for 2021 include: Unemployment compensation is taxable in 2021. Report on Schedule 1 Line 7. In tax year 2020 only, the first $10,200 of these benefits was not taxable for most households. This tax exclusion is no longer available. The deduction for tuition and fees is no longer available. Instead, the income limit for the Lifetime Learning Credit was increased. For 2021, the credit is phased out for married couples filing a joint return whose modified AGI is between $160,000 and $180,000, or between $80,000 and $90,000 for everyone else. See Form 8863 and its instructions for details. Self-employed individuals may be able to claim tax credits for Coronavirus-related sick or family leave taken during 2021. See the instructions to Form 1040 and Form 7202 for details. Taxpayers with print disabilities can now choose to receive IRS notices and other written communications in an accessible medium, such as Braille, large print, electronic or audio format. To make this choice, file Form 9000. See the form for details. For more information about these and other tax changes, see the instructions to Form 1040 and Publication 17, Your Federal Income Tax. The best way to keep up with tax law developments is by regularly checking IRS.gov. The IRS also urges community groups, non-profits, associations, education groups and anyone else with connections to people with children to share information about the Child Tax Credit, EITC and other important benefits. The IRS is providing additional materials and information that can be easily shared by social media, email and other methods.
