Tax Planning / Projecting your 2021 Return
We have reached the halfway point of 2021. By now you might have a good idea of what your total revenue will look like by years end. Now is a great time to consider a tax projection to see what your tax liability will be come filing time. With this information we can plan adjustments to your estimated payments, which will help avoid a large tax bill in April while also not overpaying (keeping your money in your pocket). This is also a good time to discuss strategies to reduce taxes, as we have almost half of the year to implement any strategies. We have already started a list of clients who have expressed interest in this service. Reach out to us if this is something that you are interested in and we will send you a more detailed email with some of the information that we will need.
Child Tax Credit
The government has issued a change to the child tax credit for the year 2021. Prior to the enactment of the American Rescue Plan Act (ARPA), the child tax credit was $2,000 per child under 17 for household income levels of $200,000 for single and head of household filers and $400,000 married filing joint. The ARPA expanded the credit to include children aged 17 along with an additional credit of $1,600 per child under 6 and $1,000 per child between 6-17. The income thresholds for this additional credit however are lower than the standard credit at $75,000 single, $112,500 head of household, and $150,000 married filing joint. If you do not qualify for the additional credit, you will still be eligible for the standard child tax credit if your income is below the original thresholds.
Additional Credit
If you qualify for the additional credit, your total child tax credit for 2021 could be as high as $3600.00. Half of the total child tax credit will now be paid out per month as advanced payments, July through December, with the remaining half claimed on the 2021 tax return. The IRS will schedule payments for July 15th, August 13th, September 15th, October 15th, November 15th, and December 15th. It is important to note that the credit is calculated off of your Adjusted Gross Income from your 2020 or 2019 tax return (the most recently filed). If your income in 2021 exceeds the limit for the additional credit but you received the advanced payments, you would not be able to claim the other half of the credit on your 2021 return (in a sense paying back the payments you weren’t supposed to receive). The IRS has an option to opt out of the advanced payments for those who may be close to the income thresholds for the additional credit, or for those who simply want a larger lump sum credit on their 2021 return. More information can be found at: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal
MN Tax Update
Earlier this year, the federal government passed a bill that made the first $10,200 in unemployment compensation non-taxable for taxpayers under the qualifying income limit, and also made PPP funding completely non-taxable. Minnesota did not originally conform to these changes and continued to collect tax on these items, but the changes have now been fully adopted during the special legislative session. The MN Department of Revenue (DOR) has announced that they will be automatically adjusting qualifying tax returns that included unemployment compensation or PPP loans as taxable income. Taxpayers will be receiving a letter from the MN DOR later this summer with an update on their refund status. Taxpayers who qualify for the automatic adjustment will receive a letter describing changes and the expected timeline for their refund. For those with more complex returns who do not qualify for the automatic adjustment, the letter will contain instructions on how the return should be amended.
IRS Delays:
The IRS has been significantly delayed in processing tax returns this year and are currently behind on roughly 35 million 2020 tax returns. We have several clients who are affected by this back log. If you have not received your anticipated refund, you can check the status of your return here: https://www.irs.gov/refunds