Things to Know for Tax Year 2021


Things to Know for Tax Year 2021

By Mark Castro, CPA

This page gives an overview of federal tax provisions that will go into effect in 2021 and items that are changing for calendar year 2021.

New Provisions from the American Rescue Plan Act of 2021

The following provisions from the American Rescue Plan Act of 2021 are applicable for 2021:

Enhancement of Child and Dependent Care Tax Credit
For 2021, the child and dependent care credit will have the following changes:

  • It will be fully refundable
  • The maximum credit rate will increase to 50%
  • The phase-out threshold is increased to $125,000 and taxpayers with AGIs over $500,000 do not qualify for the credit
  • The amount of qualifying child care expenses is increased to $8,000 for one child and $16,000 for two or more children.

This is applicable for 2021 only.

Earned Income Tax Credit Changes

The following changes were made to the Earned Income Tax Credit:

Disqualified Investment Income
The maximum amount of investment income that a taxpayer can have before it disqualifies them from claiming EITC is increased to $10,000.

Prior Earned Income Election
For 2021, a taxpayer may elect to use their 2019 earned income if their 2021 earned income is less than their 2019 earned income for calculating the 2021 Earned Income Tax Credit.

Taxpayers with Children without SSNs
Taxpayers who have children without an SSN will be eligible for EITC without children.

Individuals with no Qualifying Children
For taxable years beginning in 2021 the following changes go into effect:

  • Minimum age to qualify is lowered to 19
  • Minimum age to qualify for specified students is 24 and 18 for former foster youth or qualified homeless youth
  • Maximum age limit is eliminated
  • The maximum credit allowable is increased to $1,502

Enhancement of Child Tax Credit
For 2021, the child tax credit will be:

  • $3,000 per child over age 5 and $3,600 per child under age 6
  • Credit is fully refundable
  • Each child under age 18 will qualify for the credit
  • Half of the credit will be eligible to be paid in advance

Phase-Outs for the Child Tax Credit 
The increased child tax credit has two phase-outs:

1st Phase-Out – The credit begins to be reduced to $2,000 when AGI reaches the following:

  • Single filers - $75,000
  • Head of household filers - $112,500
  • Married filing joint filers - $150,000

2nd Phase-Out – Remaining $2,000 credit will begin to be reduced to zero when the AGI reaches the following:

  • Married filing joint filers - $400,000
  • All other filing statuses - $200,000

Advance Payment of Child Tax Credit for 2021
Under the new law, one half of the total child tax credit will be distributed to eligible taxpayers periodically from July through December. The amount of each monthly payment will be $250 for each child over age 5 plus $300 for each child under age 6.

The advance payments will be calculated based on the taxpayer’s 2020 federal return or 2019 return if the 2020 return has not been filed at the time the advance payments begin. 

IRS Online Tool for Advance Child Tax Credit
IRS will create an online tool that will allow taxpayers that are eligible to receive the advance child tax credit to do the following:

  • Opt-out of receiving the advance payments
  • Provide information on changes to:
    • Income
    • Marital status
    • Number of qualifying children

Reconciliation of Advance Payments with Calculated 2021 Child Tax Credit
If the taxpayer receives advance payments of the child tax credit, then these payments must be reconciled with the calculated 2021 child tax credit that will be calculated on the 2021 federal return.

The result of the reconciliation will be one of the following:

  • Refundable Credit – Calculated credit is greater than the advance payments received
  • Additional Tax – Advance payments received are greater than calculated credit

Safe Harbor for Excess Advance Payments
For lower income families, there is safe harbor amount of $2,000 per child if the advance payments exceed the calculated credit.

Taxpayer does not have to repay an overpayment of up to $2,000 per child (Safe Harbor amount) as follows:

  • Single – Full Safe Harbor amount when AGI is below $40,000. Phases out between $40,000 and $80,000.
  • Married Filing Joint – Full Safe Harbor amount when AGI is below $60,000. Phases out between $60,000 and $120,000.
  • Head of Household – Full Safe Harbor amount when AGI is below $50,000. Phases out between $50,000 and $100,000.

Recovery Rebate Credit
The American Rescue Plan Act included a provision for an economic impact payment to be sent to the following taxpayers:

  • $1,400 for each eligible individual ($2,800 for Married couples)
  • $1,400 for each dependent claimed on the taxpayer’s federal return

These payments are advance payments of the Recovery Rebate credit. Since most eligible taxpayers received the full amount of economic impact payment earlier in 2021, for the vast majority of taxpayers this credit will be calculated to zero.

The credit will be calculated based on income, filing status, and the number of qualifying children reported on the 2021 federal return.

The Recovery Rebate credit begins to be reduced when the individual’s AGI reaches the following:

  • $75,000 for Single filers (reduced to zero with income over $80,000)
  • $150,000 for Married Filing Joint filers (reduced to zero with income over $160,000)
  • $112,500 for Head of Household filers (reduced to zero with income over $120,000)

Taxpayers with the following circumstances will be eligible for this credit on their 2021 federal return:

  • Taxpayers who did not receive any economic stimulus payment ($2,800 – MFJ or $1,400 for all other filing statuses)
  • Taxpayer did not receive a $1,400 payment for all of their eligible dependents
  • The taxpayer’s economic stimulus payment was limited based on their income on their 2019 or 2020 return and their 2021 income is below the income limit

Extender Provisions for Individuals

As part of the 2021 Consolidated Appropriations Legislation, the extender provisions that affect individuals were extended as follows:

Made Permanent beginning with calendar year 2021:

  • Eliminated the Tuition and Fees Deduction and replaced it by increasing the income limitation for the Lifetime Learning Credit. The income limitation increased from $58,000 to $80,000.
  • Set the medical deduction floor at 7.5% of AGI on Schedule A

Extended the following provisions for 5 years (2021 – 2025)

  • Ability to exclude the gain from income on the mortgage debt when a home is foreclosed on
  • Employer credit for sick and family medical leave

Extended the following for 1 year (2021)

  • Ability to treat mortgage insurance premiums as qualified mortgage interest on Schedule A
  • Nonbusiness energy property credit that is claimed on Form 5695
  • Credit for 2-Wheeled plug-in electric vehicles
  • Credit for new qualified fuel cell motor vehicles

New Provisions from the 2021 Consolidated Appropriations Legislation

The following provisions go into effect in 2021:

  • Businesses may deduct 100% of business meal expenses for 2021 and 2022
  • Non-itemized charitable cash contribution deduction has been made permanent as well as allowing up to $600 for Married filing joint returns ($300 for single)

Self-Employed Credit for Sick and Family Leave

The American Rescue Plan made the following changes to this credit that is reported on Form 7202 (Credits for Sick Leave and Family Leave for Certain Self Employed Individuals):

  • Extended the credit through September 30, 2021
  • The 10 day maximum for sick leave is reset starting April 1, 2021. The original 10 day limit was applied April 1, 2020 – March 31, 2021.
  • Family leave credit may be claimed for up to 60 days at $200 per day for a maximum credit of $12,000.

Below is an explanation of this credit:
To be eligible, an individual must be conducting a business that qualifies as self-employment income and be eligible to receive qualified sick or family leave wages under the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act as if the individual was an employee.

Credit for Sick Leave
May claim up to 10 days if the individual was unable to perform services as a self-employed individual due to COVID-19 related reasons or the individual was caring for an individual because of COVID-19 related reasons.

For the first three months of 2021, the maximum days are determined for the period April 1, 2020 – March 31, 2021. Then, an additional 10 days are available from April 1, 2021 – September 30, 2021.

Credit amount is:

  • For individual themselves - $511 per day
  • For caring for others - $200 per day

Credit for Family Leave
For 2021, a person may claim up to 60 days if the individual was unable to perform services as a self-employed individual because of certain COVID-19 related care they provided to a son or daughter under the age of 18 whose school or place of care is closed for reasons related to COVID-19.

The credit amount is $200 per day.

Premium Tax Credit

For 2021 and 2022, expands the eligibility for and amount of premium tax credit by modifying the income eligibility criteria and the credit formula as follows:

  • Eliminates the phase-out for households with annual incomes above 400% of the federal poverty level
  • Increases the credit amount by reducing the percentage of annual income that eligible households would be required to contribute toward the insurance premium. The temporary percentages would range from 0% to 8.5% of household income.

For 2021, individuals who receive unemployment compensation would be deemed to have met the premium tax credit income eligibility criteria by disregarding household income above 133% of the federal poverty level.

Extender Provisions for Businesses

As part of the 2021 Consolidated Appropriations Legislation, the extender provisions that affect businesses were extended as follows:

Made Permanent beginning with calendar year 2021:

  • Energy Efficient commercial buildings deduction
  • Benefits provided to volunteer firefighters and emergency medical responders
  • Railroad track maintenance credit

Extended the following provisions for 5 years (2021 – 2025):

  • 7 year recovery for motor sports entertainment complexes
  • Empowerment zone tax incentives
  • New Markets tax credit
  • Work Opportunity credit
  • Expensing rules for certain productions
  • Exclusion for certain employer payments for student loans
  • Extension of Carbon Sequestration credit
  • Look-through rule related to controlled foreign corporations

Extended the following for 1 year (2021):

  • Credit for health insurance costs for eligible individuals
  • Indian Employment credit
  • Classification of certain race horses as 3 year property
  • Accelerated depreciation for business property on Indian reservations
  • Credit for electricity produced from certain renewable resources
  • Extension and phase out of energy credit
  • Alternative Fuel Refueling Property credit
  • Production credit for Indian coal facilities
  • Energy Efficient Home credit
  • Extension of excise tax credits relating to alternative fuels
  • Extension of Residential Energy-efficient Property credit and inclusion of biomass fuel property expenditures
  • Mine Rescue Team Training credit
  • American Samoa Economic Development credit
  • Black lung disability trust fund excise tax
  • Second Generation Biofuels Producer credit

CARES Act Employee Retention Credit

The CARES Act Employee Retention Credit was modified twice for 2021. First by the Appropriations legislation at the beginning of 2021, and then by the American Rescue Plan enacted on March 11, 2021.

2021 Consolidated Appropriations Act made the following changes to the CARES Act Employee Retention Credit

  • Extended credit until June 30, 2021
  • Credit is 70% of qualified wages (50% for 2020)
  • Maximum amount of qualified wages is $10,000 per quarter (Maximum for 2020 is $10,000 for all of 2020)
  • Gross receipts test is satisfied for any quarter in first half of 2021 in which gross receipts are less than 80% of the same quarter in 2019. There is an exception – If a business did not exist at the beginning of the same quarter of 2019, the same quarter in 2020 is substituted.
  • For 2021, businesses also have the option to elect to satisfy the gross receipts test by looking at the immediately preceding calendar quarter and comparing that quarter to the corresponding quarter in 2019.
  • Increases the threshold number of employees before a change in treatment arises to 500
  • New rule for 2021 – Small employers (has fewer than 500 Full-Time Employees) may receive the credit in advance. Any advance payment will need to be reconciled with the actual credit amount for each quarter.

American Rescue Plan Changes to CARES Act Employee Retention Credit

  • Extended credit until December 31, 2021
  • For period July 1, 2021 – December 31, 2021, the credit may be taken against the employer’s share of the 1.45% hospital insurance payroll tax instead of the 6.2% old age, survivor, and disability insurance.
  • Allows a credit of up to $50,000 per calendar quarter to a startup business. A startup business is defined as a business established after February 15, 2020 with average annual gross receipts of less than $1 million.