Category: blog&news

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CHILD & DEPENDENT CARE CREDIT FAQS

For 2021, the American Rescue Plan Act made child, and Dependent care credit substantially more generous. Now taxpayers can get up to $4000 for one qualifying person and $8000 for two or more qualifying persons. Thus, child and dependent care credit can help you pay for the care of eligible children and other dependents. In addition, this is a potentially refundable credit, so you might not have to owe taxes to claim the credit as long as you meet the other requirements. Below are some FAQs that can help you learn if you are eligible and, if eligible, how to calculate your credit.

  • Are you eligible to claim the credit?

You are eligible to claim this credit if you (or your spouse in the case of a joint return) pay someone to care for one or more qualifying persons for you to work or look for work, and your income level is within the income limits set for the credit.  If you are married, you must file a joint return to claim the credit.  However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still claim the credit.

  • How do you claim the credit?

 To claim the credit, you will need to complete Form 2441, Child and Dependent Care Expenses, when you file your Federal income tax return. You should keep records of your work-related expenses.  Also, if your dependent or spouse is unable to take care of himself or herself, your records should show both the nature and length of the disability.  Other records you should keep to support your claim for the credit.

  • What information do you need from my care provider to claim the credit?

You must identify all persons or organizations that provided care for your child, dependent, or spouse.  To identify the care provider, you must give the provider’s name, address, and taxpayer identification number (TIN). If the care provider information you give is incorrect or incomplete, your credit may not be allowed. 

  • Who is a qualifying person?
  • Your dependent who is under age 13 when the care is provided;
  • Your spouse, if your spouse isn’t mentally or physically able to care for himself or herself and lives with you for more than half the year;
  • and A person who isn’t mentally or physically able to care for himself or herself lives with you for more than half the year, and either:
    • Is your dependent OR
    • Would have been your dependent except that (i) he or she receives more than a certain gross income amount ($4,300 in 2021), (ii) he or she files a joint return, or (iii) you (or your spouse in the case of a joint return) can be claimed as a dependent on someone else’s return.
  • What percentage of my work-related expenses are allowed as a credit?

The percentage of your work-related expenses allowed as a credit depends on your income (and your spouse’s income in the case of a joint return).  The maximum percentage of your work-related expenses allowed as a credit for 2021 is 50 percent.

  • When does the 50% amount begin to phase out?

The amount of your adjusted gross income determines the percentage of your work-related expenses that you are allowed as a credit. For 2021, the 50-percent amount begins to phase out if your adjusted gross income is more than $125,000, and completely phases out if your adjusted gross income is more than $438,000.

  • Is there a limit on the amount of work-related expenses you can take into account in calculating the credit?

 Yes. The maximum amount of work-related expenses you can take into account for purposes of the credit is $8,000 if you have one qualifying person, and $16,000 if you have two or more qualifying persons.  This means that the maximum total amount of the credit is $4,000 (50 percent of $8,000) if you have one qualifying person, and $8,000 (50 percent of $16,000) if you have two or more qualifying persons.

Please know that IRS continually updating information regarding the child and dependent care credit. For more information on this topic please visit IRS.GOV

blog&news

IRS WILL AUTO RECALCULATE TAXES ON UNEMPLOYMENT

To help taxpayers, the IRS annouced today that it will take steps to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan.

Here is quick summary on the press release:

Taxpayer who filed prior to change to the handing of the unemployment benefits

  • IRS will AUTO Recalculate
  • IRS will refund any resulting overpayment or apply to outstanding taxes owed
  • The first refunds are expected to be made in May and will continue into the summer.
  • NO need to file an amendment unless…
    • The calculation changes make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return.
  • For Taxpayers who have yet to file
    • Our software has been updated to accommodate.
    • Prepare the return as you would normally

CLICK HERE to read the full press release.

blog&news

TAX DAY FOR INDIVIDUALS EXTENDED: MAY 17

The Treasury Department and Internal Revenue Service announced today that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days.

This one-month delay is not as much extra time as the IRS offered last year when the filing deadline was pushed to July 15. But it should make it easier for the taxpayer to get a handle on their finances – as well as tax changes that took effect just this month with the signing of the American Rescue Plan. The new law made the first $10,200 of unemployment benefits received in 2020 tax-free for people with an income of less than $150,000, a significant change for many whose jobs were affected by the pandemic.

Please CLICK HERE to read the full article on IRS.gov

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2021 E-FILE START DATE: FEBRUARY 12 😲

IRS announces the start of e-File for the 2021 Tax Season will be Friday, February 12th. 

Today, the IRS announced the e-file start date for the 2021 tax season, which came as a surprise to many of us since normally IRS starts accepting tax returns no later than the last week of January. However, this year, the IRS will need more time to prepare after the COVID relief act that took effect in late December. And yes, the tax filing deadline is still April 15. “If filing season were opened without the correct programming in place, then there could be a delay in issuing refunds to taxpayers,” the IRS said in its announcement. Click the link below to read the full news release.

Key filing season dates

January 29. Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people – including the option to use prior-year income to qualify.

February 12. IRS begins 2021 tax season. Individual tax returns begin being accepted and processing begins.

February 22. Projected date for the IRS.gov Where’s My Refund tool being updated for those claiming EITC and ACTC, also referred to as PATH Act returns.

First week of March. Tax refunds begin reaching those claiming EITC and ACTC (PATH Act returns) for those who file electronically with direct deposit and there are no issues with their tax returns.

April 15. Deadline for filing 2020 tax returns.

October 15. Deadline to file for those requesting an extension on their 2020 tax returns

Click the button below to read the official IRS news release regarding the start of e-File for the 2021 Tax Season

CLICK HERE to read to full IRS news release.

blog&news

2020 IRS TAX UPDATES

Form 1099-NEC

The 1099-NEC disappeared in the early ’80s, and after a 38 absence is making a disco comeback! This form will be used to report non-employee compensation in box 1, meaning that nonemployee compensation will no longer be reported on Form 1099-MISC. Form 1099-NEC will need to be entered on a Schedule C. This form should be issued to your client by January 31, the same deadline for Form W-2. Box 4 will be used to report any backup withholding.

Form 8915-E

Form 8915-E will be used to report distributions and repayments for 2020 qualified disasters and 2020 distributions subject to the CARES Act, which allows up to $100,000 in distributions spread out over three years.

Form 5884-A – Employee Retention Credit

This is a new form that will be used to report a refundable credit that employers may receive under the CARES Act for retaining employees when their businesses were required to shut down due to COVID-19.

Form 7202 – Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals

This form will be used to calculate the refundable credits for sick and family leaves caused by the COVID-19 outbreak. The sum of the sick leave credit and the family leave credit will be included on Schedule 3 (Form 1040), line 12b.

Form W-4

Form W-4 was completely redesigned for tax year 2020. The goals of the redesign were to align the form with the changes resulting from the Tax Cuts and Jobs Act and prevent people from under-reporting their allowances. There is a new 5 step process that guides taxpayers through the form. The updates include:

  • Personal withholding allowances were eliminated
  • Step 3 allows taxpayers to indicate that they are eligible for the Child Tax Credit or the Other Dependent Credit
  • Step 4 is an optional section that allows taxpayers to make adjustments for additional withholding, reduce withholding, and enter additional income tax they would like withheld from each paycheck
  • The exemption line was removed

Form 1040

There are several changes to Form 1040 this year.

  • Line 30 has been added for the Recovery Rebate Credit
  • Line 10b has been added to account for charitable cash contributions up to $300 being treated as above-the-line deductions (reported on Schedule A)
  • There are three separate lines for withholdings
  • The question about cryptocurrency has been moved higher up on the form

Form 1099-MISC

With the reinstatement of Form 1099-NEC to report nonemployee compensation (details above), Form 1099-MISC has been updated for 2020. The box numbers have been rearranged to comply with the removal of nonemployee compensation.

  • Box 7 – Payer made direct sales of $5,000 or more
  • Box 9 – Crop insurance proceeds
  • Box 10 – Gross proceeds to an attorney
  • Box 12 – Section 409A deferrals
  • Box 14 – Non-qualified deferred compensation income
  • Boxes 15 – State taxes withheld
  • Box 16 – State identification number
  • Box 17 – Amount of income earned in the state

Clients expecting a 1099-MISC should receive the form by February 28. This due date has also changed from previous years.

Updated EIC Amounts

As is every year, the income limits and maximum credit amounts for EIC adjust for inflation. The below blurry image (sorry) reflects those changes … if you squint, the amounts show up clearly.

Tax Year 2020: Changes to IRS Form 1040

The IRS recently released a draft of Form 1040, U.S. Individual Income Tax Return. Here is a look at some of the most significant changes proposed for the tax year 2020 (returns filed in 2021). Please note: The information below is subject to change. The draft of Form 1040 should not be used to file your clients’ taxes.

Stimulus Checks and the Recovery Rebate Credit

According to the draft, a new Line 30 has been added on page two of Form 1040 for the “Recovery Rebate Credit.” This is where taxpayers who did not get the payments or should have received larger payments (due to birth of child or changes in income) will enter the additional amount due. This amount will be treated as a refundable credit. The reconciliation of stimulus payments will be done on a worksheet contained in the Form 1040 Instruction, which has not yet been released.

CARES Act Relief

The “Amount You Owe” section of the new 1040 now says, “Schedule H and Schedule SE filers, line 37 may not represent all of the taxes you owe for 2020.” This is because, under the CARES Act, employers can defer deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made between March 27, 2020, and December 31, 2020. This deferred amount will be reported in the Payments section of Form 1040, Schedule 3, Line 12e as a “Deferral for certain Schedule H or SE filers.” For self-employed taxpayers, a third page is being added to the Schedule SE where the deferred portion of the self-employment tax will be calculated. Schedule H will also be redesigned to address the deferred portion of the social security tax deposits made by taxpayers who have household employees. The new refundable credit for qualified sick and family leave will be entered on Schedule 3, Line 12b. The credit amount will be calculated on Form 7202, which the IRS has not released yet in draft form.

Above-the-line Charitable Contributions

For tax year 2020 only, charitable cash contributions up to $300 will be treated as above-the-line deductions (reported on Schedule A). The new Line 10b is for charitable contributions for taxpayers taking the standard deduction.

Reporting Income Tax Withholding

Instead of a single line for federal income tax withholding, the new Form 1040 has three separate lines for withholdings: Line 25a is for Form W-2, Line 25b is for Form 1099, Line 25c is for other forms (see instructions). Line 25d is the total tax withholdings. This should make withholding reconciliation much easier for tax preparers to recognize.

Reporting Cryptocurrency

The question about virtual currency first appeared in 2019 as a checkbox at the top of Schedule 1, Additional Income and Adjustments to Income. For tax year 2020, the question “At any time during 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency?” has been moved just below the taxpayer’s name and address on the main Form 1040.

The IRS has taken the position that virtual currency is considered an investment property, and any transaction involving the sale or exchange of virtual currency must be accounted for on the tax return just as a taxpayer would account for the sale of any other investment. This will most likely involve a reportable transaction on Form 8949.