As we begin the 2021 tax filing season, there are important tax law changes to be aware of before preparing your tax return.

There are three issues that will affect many individuals.

Advanced Child Tax Credit

In years past, the child tax credit (CTC) was only partially refundable, meaning the credit would effectively be reduced from $2,000 if it exceeded the tax liability by more than $1,400 per qualifying dependent. Further, taxpayers could only claim a credit for a qualifying dependent 16 years old or younger. However, in 2021, alterations were made to provide more financial assistance to families.

Now the CTC is fully refundable and qualifying dependents include 17-year-olds. The credit was increased to $3,000 ($3,600 for dependents age 0-5 years) for taxpayers under a certain Adjusted Gross Income (AGI). This increase begins to phase out at the AGI threshold of $75,000 for single filers, $112,500 for heads of household and $150,000 for married filing joint filers. And the total CTC is reduced by $50 for every $1,000 the taxpayer’s AGI exceeds these thresholds.

Taxpayers with higher incomes, up to $200,000-plus for single filers and $400,000-plus for married filing joint filers, are eligible for the previous $2,000 CTC per qualifying dependent.

Another significant update involves the timing of CTC payments. In the past, the CTC could only be claimed (and refunded) upon filing a tax return. In 2021, the American Rescue Plan directed the IRS to issue payment of one half of the estimated 2021 CTC to each taxpayer during the tax year. Beginning in July of 2021, qualifying taxpayers (based on 2020 income) were issued this credit amount in advance via six monthly payments.

What to know for tax season

If the estimated CTC was accurate, you will receive the other half of your total CTC on your 2021 tax return. However, if you qualify for more than previously estimated, you might be entitled to a larger refund or if you qualified for less, you would owe the IRS payment. (Note there is repayment protection for those reporting income under certain levels.)

Be sure to save IRS letter 6419 which reports the amount of advanced CTC you (and your spouse, if married) received. This amount will be required to report on your tax return. The IRS has warned that any discrepancy between the amount of advanced CTC paid and the amount claimed on the tax return will result in a significant delay in processing and issuing refunds.

Economic Impact Payments

Economic impact payments (EIP) (frequently referred to as stimulus checks) were another government initiative to provide economic relief during the pandemic. The first two were issued in 2020 and early 2021 and were reconciled on the 2020 tax return. The third issued in March 2021, will be reported and reconciled on the 2021 tax return.

There are some differences between the third EIP and the previous two. The first is the income phaseout level. The first two stimulus checks had a gradual phaseout, qualifying more individuals for the payments, whereas the third payment cut off all benefit for taxpayers with AGI exceeding $80,000 for individuals and $160,000 for married filers.

The other difference is the payment amounts. Taxpayers eligible for the third EIP received $1,400 for each person reported on the tax return. For example, a qualifying family of four (taxpayer, spouse, two children) should have received $5,600. Lastly, the third EIP was paid for all dependents rather than just those younger than 17.

What to know for tax season

IRS Letter 6475 was sent to all recipients of the third EIP in January 2022. This form will be used to prepare your 2021 tax return and reconcile the EIP to the ultimate recovery rebate credit. Unlike the advanced child tax credit, any excess EIP is not required to be paid back. Even if you received an EIP for more than the amount you qualify for on your 2021 return (or if you do not qualify at all), no repayment is required. If you qualify for more recovery rebate credit than the EIP you received, it will be applied to your 2021 tax liability or refunded.

Charitable Donations

Before 2021, the maximum deduction for donations to a charity was limited to 20%-60% of an individual’s AGI. The exact percentage depended on the type of donation and type of charity.

However, recent changes provide the option to increase the deduction limitation to 100% of AGI for cash contributions to qualified charities. Additionally,100% AGI deductions are used after other types of charitable donations, such as capital gain property or non-cash contributions, to offset tax.

These changes offer significant planning opportunities and should be considered carefully before filing. Another difference to note for 2021 is even if you use the standard deduction, you can claim a deduction for qualified cash contributions of $300 for single filers or $600 for joint filers.

What to know for tax season

Make sure all your charitable contributions are substantiated before you report the related deduction on your tax return. Substantiation for cash contributions must include written acknowledgment from the qualified charity of the amount donated and the value of any goods or services received because of the donation. Other types of contributions might require more extensive documentation.

Overall, it is important to stay informed on any and all tax changes so you can have a successful 2021 tax season.