Tax Report: Families Unearth New Tax Breaks

Coronavirus relief legislation signed by President Biden earlier this month contains unprecedented benefits for families with children and other dependents — especially for some who plan carefully.

The new benefits, which apply for 2021, are most significant for low-income families, but they extend well to the middle class, many of whom are entitled to more than $10,000 of tax-free income for this year. . High earners may also benefit from some changes, such as the expansion of tax breaks for childcare costs.

The design of these provisions creates powerful incentives for many families to pay close attention to their 2021 adjusted gross income. Some of this year’s best benefits phase out above certain income thresholds: $150,000 for couples spouses filing jointly, $112,500 for filers who are heads of families and $75,000 for single filers.

As a result, people likely to earn above the limits may want to legally reduce their income this year to accommodate it, and those who normally earn less may want to avoid a spike in income that could cost them dearly.

Coronavirus relief legislation signed by President Biden earlier this month contains unprecedented benefits for families with children and other dependents — especially for some who plan carefully. (AP Photo/J. David Ake, file) (AP)

IRS SAYS UNEMPLOYED WORKERS LIKELY CAN CLAIM $10,200 IN TAX RELIEF WITHOUT FILING AN AMENDED RETURN

Here’s a real-life example of how limits can dramatically affect a family’s finances. Patrick and Laura Peterson live in Aston, Pennsylvania, and have four children, ages 2, 3, 5, and 8. Last year, Mr Peterson, a bank manager, took a $33,000 taxable Covid withdrawal from his pension plan as an emergency cushion. This boosted their 2020 income enough above $150,000, to disqualify them from six third-round stimulus payments of $1,400 after Mr Peterson filed his 2020 tax return in early February.

Since the Petersons’ income will fall well below $150,000 this year, they will be able to claim those refund credits worth $8,400 when they file their 2021 tax return next year. They will also likely get additional child credits of $5,200 that would be reduced if their income was higher, giving them $13,600 in tax-free income this year thanks to these new breaks.

“I have four kids, a mortgage and two car payments. My wife is a nurse. We need those benefits, and I didn’t want to miss them because of a Covid withdrawal,” Mr Peterson says.

For those who earn above the thresholds for 2021, there are still benefits. The new law this year more than doubles the usual $5,000 annual limit per household on pretax contributions to flexible spending accounts for employer-sponsored dependent care. It also includes a complex expansion of the Child and Dependent Care Tax Credit.

Here’s information to help maximize the new 2021 tax benefits for families.

Understanding Third Round Stimulus Payments.

For many families, the most generous benefit of 2021 is the third round of stimulus payments or refund credits of up to $1,400 per household member, even for older children and adult dependents.

The Internal Revenue Service is sending payments now, but people who don’t qualify based on 2019 or 2020 income and who qualify based on 2021 income can get refund credits for those amounts this year. next via their 2021 tax returns.

Learn about other child-related changes this year.

The additional child tax credit can reach $1,600 per child under 6 and $1,000 per child under 18 at the end of the year. This is in addition to the existing child credit of up to $2,000 per child, which applies this year to dependents who are under 18 at the end of the year, compared to under 17 in other years.

Beginning July 1, taxpayers can receive advance payments of a portion of these benefits from the IRS. Details have not been announced.

Workers with employer-sponsored dependent FSAs can contribute up to $10,500 of pre-tax income to pay for care expenses in 2021, up from the normal $5,000. The employer must opt ​​for this change, but many are expected to do so.

The child and dependent care credit has also been expanded so that up to $8,000 of expenses are covered for a dependent (instead of $3,000) and up to $16,000 for two or more people (instead of $6,000).

IRS TAX DEADLINES: WHAT YOU NEED TO KNOW

Watch for deletion phases.

For stimulus payments and rebate credits, the phasing out is abrupt. The range is $150,000 to $160,000 for married joint filers; $112,500 to $120,000 for head of household filers; and $75,000 to $80,000 for single filers.

For this year’s additional child credits, the taxpayer loses $50 of credit for every $1,000 of income beyond the starting point of the phase-out. Thus, a couple with an income of $200,000, four children and $5,200 in additional credits would lose $2,500 in credits due to the phase-out. For the existing Child Tax Credit, the phase-out still starts at $400,000 for joint filers and $200,000 for single filers and heads of household.

FSA contributions for dependent care have no income limit other than the earned income of the low-income spouse. So if one spouse earns, say, $5,000, the couple cannot invest more in the FSA. Employers also need to ensure that plans do not favor high earners too much.

The 2021 Child and Dependent Care Credit features a complex phase-down in rate and phase-out based on income. According to Melissa Labant, a lawyer and CPA of the accounting firm CLA, the credit goes from 50% to 20% of expenses for most joint filers with incomes between $125,000 and $183,000. Above $183,000 the rate is 20% down to $400,000, then the rate drops until the break is completely removed at $438,000.

Know what income matters and what reduces it.

The income thresholds correspond to “modified adjusted gross income”, but for most filers, this means their AGI on line 11 of Form 1040. .

What reduces AGI? Contributions to retirement plans such as 401(k)s; tax-deductible contributions to IRAs and SEP IRAs; pre-tax contributions to health savings accounts; and pre-tax contributions to flexible spending accounts for medical or dependent care, among others. A married couple under 50 could reduce their AGI by more than $50,000 by making maximum 401(k) and flexible spending account contributions for 2021.

If a filer reports self-employment income on Schedule C, business deductions could also reduce AGI.

GET FOX BUSINESS ON THE ROAD BY CLICKING HERE

Revisit FSAs in relation to child care and dependent care credits.

In previous years, many upper-tier taxpayers with two or more children benefited from the ASF maximization for dependent care and then the dependent care and child care credit for expenses. remaining eligible custody. Expenses can only be claimed once.

The expansion of the 2021 Child and Dependent Care Credit complicates this analysis. However, FSA contributions retain the advantage of not being subject to payroll taxes or, in many cases, state taxes.

It can be difficult to determine which benefit is most valuable at which income level, Labant says, especially because some states also have care credits.

According to his rough calculations, many married joint filers with incomes of $150,000 or less will benefit more from the child care credit, while those earning more than $160,000 should generally turn to the FSA first. . But many filers will have to run the numbers to find out.

She adds, “Maybe these parents have kids who can double-check their math.”


Source link

Comments are closed.