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Welcome to the 2022 Tax Filing Season! Similar to the last few years, the filing deadline for 2021 personal tax returns is a few days after the traditional April 15th deadline. Individual tax returns are due April 18th due to the Emancipation Day holiday in Washington, DC falling on April 15th.
Beginning Monday, January 24th, 2022, the IRS has officially started accepting electronically filed tax returns. North Carolina is a few weeks behind the IRS, anticipating a Mid-February start date for accepting electronically filed NC tax returns. With the approval of the state budget in late November 2021, North Carolina requires some additional time to test and update its systems.
There are a few changes to be mindful of this tax season when preparing your 2021 individual tax returns. There are opportunities to take advantage of and additional reporting to be aware of due to various COVID relief provisions. In its news release on January 24th, 2022, the IRS “urges extra caution for taxpayers to file accurate tax returns electronically to speed refunds, avoid delays.”
The American Rescue Plan Act of 2021 provided the third round of economic impact payments (commonly referred to as the third stimulus check) in March 2021. As the IRS processed 2020 tax returns, they continued sending out payments throughout the year for certain taxpayers. In late January 2022, the IRS sent out Letter 6475 to recipients of the third economic impact payments. If you received the letter, make sure to keep it and use it to prepare your 2021 tax return. The letter will provide the amount received for the third stimulus payment.
If you did not receive the entire economic impact payment that you were entitled to, you might be eligible to claim a tax credit on your 2021 federal tax return. If applicable, the tax credit could reduce your 2021 taxes and potentially result in a refund or less tax due with your 2021 tax returns. Common examples of taxpayers eligible for the recovery rebate credit may include parents of a child born in 2021 (since the initial payment in March 2021 wouldn’t have included an amount for their newborn). Taxpayers that had a decline in their 2021 income may qualify for the recovery rebate credit if their 2020 income previously exceeded the eligibility limit for the third economic impact payments.
In addition to the above-mentioned third stimulus payment, The American Rescue Plan Act of 2021 also expanded the Child Tax Credit for the tax year 2021 only. One of the Act’s provisions included Advanced Child Tax Credit Payments for qualifying taxpayers. In the past, the child tax credit would be claimed when you filed your tax return. For 2021 only, the IRS provided an advance payment equal to one-half of the anticipated child tax credit, over six monthly payments starting in July. For example, if based on your level of income and number of qualifying children, your anticipated 2021 child tax credit is $9,600, unless you opted out, the IRS would have sent advance payments of $800 per month from July through December.
The advanced payments received during 2021 would reduce the amount of tax credit ultimately claimed on your 2021 tax return. Beginning in late December 2021 and into January, the IRS mailed Letter 6419 to taxpayers that received the advance payments. Taxpayers should use the amounts reported in Letter 6419 to reconcile and claim the remaining child tax credit they are entitled to when filing their 2021 federal tax return. If Letter 6419 was misplaced, you could create an online account with the IRS to check the number of advance payments received.
Another benefit that the American Rescue Plan Act provided was increasing the child and dependent care credit for the tax year 2021 only. Generally, the child and dependent care credit is a tax credit available to taxpayers who pay expenses for the care of a qualifying individual (i.e., a dependent child), which enables the taxpayer to work. If filing a joint tax return, generally, both spouses must have earned income to qualify for the credit. Expenses eligible for the credit may include daycare expenses, preschool & nursery school tuition, summer day camps, and a household employee that provides care for qualifying individuals. Tuition paid for kindergarten or higher grades do not qualify for the credit, but before and after-school programs may be eligible.
In general, a qualifying child would be a dependent under 13 when the care was provided. For 2021, the maximum qualifying expenses used to calculate the credit would be $8,000 for one qualifying individual or $16,000 for two or more qualifying individuals. Depending on a Taxpayers’ level of income, the tax credit could be equal to 50% of the qualifying expenses. For 2021, the potential tax credit could equate to $8,000 for qualifying taxpayers (50% of $16,000 of qualified expenses). Comparatively, the maximum credit for 2020 was $2,100.
To see how you may be able to reduce your 2021 taxes!
Robert “Bob” Schwinn is a CPA licensed in North Carolina. He is the founder of SCHWINN CPA PLLC, a CPA firm specializing in serving small businesses and their owners. Bob has over 16 years of tax & accounting experience and works with clients in a variety of industries. Please visit www.schwinncpa.com to learn more.
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