Understanding 2021 Tax Updates
(before you file your taxes)
This meme pops up in my social media feed from time to time: It’s clever and a bit funny, but the sad truth is that it would be pointless to teach the specifics of taxes in school. Unlike parallelogram rules, tax rules change every year. Things we learned in high school that might be helpful during tax season would likely be superseded before we finished our first semester in college. In this age of activism and immediate results, our Congress just can’t help themselves. They must legislate! This year was no different. There are numerous changes to the tax laws for 2021. Some you likely know about, others you might not. Here I will cover the handful likely to impact a significant portion of military and veteran families.Child Tax Credit
Congress made several changes to this popular tax credit. They expanded it, changed the age range, made some of it payable in advance, and made it fully refundable without restrictions. Here are the details- The maximum credit was expanded from $2,000 to $3,000 ($3,600 for children under 6.) There is an AGI limitation on this expanded amount. The expanded amount begins to phase out above AGI of $150,000 for married couples filing jointly, $112,500 for taxpayers filing as head of household, and $75,000 for all other filers. (The unexpanded (regular amount – $2,000 begins to phase out at $400,000 AGI for married couples filing jointly.)
- Qualifying children under the age of 18 are eligible for the credit. (In prior years it was qualifying children under the age of 17.)
- Part of the 2021 Child Tax Credit was eligible to be paid as an advance. The default was for the IRS to pay 1/12th of the estimated 2021 credit each month to taxpayers from July to December of 2021. You may have received checks or direct deposits to your bank account. Or you may have elected out of some (or all) of the advanced payments. Either way, you will need to rectify the amount of Child Tax Credit for which you are eligible with the amount of Advanced Child Tax Credit already received to determine how much more Child Tax Credit you will receive at the time you file your 2021 federal tax return. The IRS should send you a letter 6419 telling you how much Advanced Child Tax Credit you have received. Verify this letter against your records to ensure they match. Then keep the letter for tax prep time!
- The 2021 Child Tax Credit is fully refundable for all taxpayers. In prior years the refundable portion was limited and subject to earned income restrictions. This year it is fully refundable.