In this final part of consideration to lower taxpayers’ tax liabilities, we highlight some other savings items. The list is not exhaustive. Taxpayers are encouraged to consult with their tax professionals to discuss their specific tax situation. Major tax savings could only occur if you act by December 31, 2021 because after that date only a few minor tax strategies could be used.
Deductions for Excess Business Losses
The ARP allows taxpayers other than corporations to deduct excess farm losses and excess business losses through 2027. An excess business loss for the tax year is the excess of aggregate deductions attributable to your trades or businesses over the sum of your aggregate gross income or gain plus a threshold amount. The threshold amount for 2021 is $262,000 or $524,000 for joint returns.
Qualified Business Income Passthrough Tax Break
Under the qualified business income tax break, a 20 percent deduction is allowed for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizers and nonitemizers, it is taken on your individual tax return as a reduction to taxable income. This tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below $164,900 ($329,800 for joint filers; $164,925 for married individuals filing separately) are simpler and more permissive than the ones that apply to individuals with taxable income above those thresholds.
Child Tax Credit
The ARP significantly increased the child tax credit (CTC) available in 2021. The CTC was increased from $2,000 to $3,000 or, for children under 6, to $3,600. The age of a child for which the credit is available was raised from 16 to 17. Further, the refundable amount of the 2021 CTC equals the entire credit amount, rather being based on an earned income formula. Under modified phase-out rules, the modified adjusted gross income threshold which determines if an individual qualifies for the CTC was reduced to $150,000 in the case of a joint return or surviving spouse, $112,500 in the case of a head of household, and $75,000 in any other case.
Earned Income Credit
The ARP also expanded eligibility for the earned income tax credit (EITC) in 2021 and increased the amount of the credit available. For 2021, the minimum age to claim the so-called “childless EITC” for workers without qualifying children (i.e., dependent children who live with the taxpayer for more than half the year) is reduced from 25 to 19 (except for certain full-time students) and the upper age limit for the childless EITC is eliminated. In addition, the childless EITC amount has been increased so that the maximum EITC for 2021 for a childless individual is now $1,502.
The ARP also repealed a provision which prohibited an otherwise EITC-eligible taxpayer with qualifying children from claiming the childless EITC if he or she could not claim the EITC with respect to qualifying children due to failure to meet child identification requirements (including a valid SSN for qualifying children). This prohibition no longer applies.
Finally, the ARP increased to $10,000 the amount of investment income a person could have and still qualify for the EITC. In addition, taxpayers can compute their EITC amount for 2021 by substituting their 2019 earned income for their 2021 earned income, if 2021 earned income is less than 2019 earned income.
Dependent Care Assistance Tax Benefits
The ARP provided a number of favorable changes to tax benefits relating to dependent care assistance, including: (1) making the child and dependent care tax credit (CDCTC) refundable; (2) increasing the amount of expenses eligible for the CDCTC; (3) increasing the maximum rate of the CDCTC; (4) increasing the applicable percentage of expenses eligible for the CDCTC; and (5) increasing the exclusion from income for employer-provided dependent care assistance.
Life events can have a significant impact on your tax liability. For example, if your filing status last year was Head of Household or Surviving Spouse and your filing status for 2021 is Single, then your tax rate will go up. If you married or divorced during the year and changed your name, you need to notify the Social Security Administration (SSA). Similarly, the SSA should be notified if you have a dependent whose name has been changed. A mismatch between the name shown on the tax return and the SSA records can cause problems in the processing of tax returns and may even delay tax refunds. When you were a victim of identity theft, the IRS sent you a PIN to use when you file your tax return. Let your tax professional know if you have been impacted by a life event, such as a birth, death or divorce in your family, the loss of a job or a change in jobs, or if you retired during the year. All of these and others can affect your tax situation.
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