Welcome to the craziness that is the 2020 tax filing season!
Because the IRS is still playing catch-up from last year, in addition to new tax laws passed in the middle of this year’s tax filing season, the April 15 individual tax return deadline was moved to May 17. Read about how these new tax laws affect both your 2020 and 2021 tax returns.
If you are a renter, read about the importance of renters insurance.
Please call if you would like to discuss how this information could impact your situation. If you know someone who can benefit from this newsletter, feel free to send it to them.Upcoming dates
- April 15 – First quarter 2021 estimated tax payments are due
- May 17 – Individual income tax returns for 2020 are due
In this issue:
- ALERT! Late Tax Legislation Creating HavocIndividual tax return deadline moved to May 17
- New Tax Breaks Benefit MillionsWhat you need to know
- Don’t Overlook Renters Insurance
ALERT! Late Tax Legislation Creating Havoc
Individual tax return deadline moved to May 17
Congress’ recent move to retroactively make a portion of 2020 unemployment income tax-free is creating havoc during this year’s tax filing season. Here is what you need to know.
Unemployment compensation was received by millions of Americans during 2020 because of the pandemic. While unemployment income was necessary for many who lost a job, it’s also normally classified as taxable income to be reported on your tax return. Recently-passed legislation now makes the first $10,200 ($20,400 for married filing joint tax returns) of 2020 unemployment compensation tax-free. This tax-free unemployment income is available for those with adjusted gross income under $150,000.
The new legislation which contains this tax break didn’t become law until March of 2021, a full three months after the end of the tax year and after millions of Americans had already filed their 2020 tax return!
Understanding your situation
- If you’ve already filed your 2020 tax return: The IRS recently announced it is going to automatically process refunds for unemployment earnings that should not be taxed beginning in May. It will start with unmarried tax returns and finish with married filing joint tax returns that qualify to exclude unemployment income. This will avoid the need to file an amended tax return for most taxpayers unless the reduced income allows you to qualify for other tax benefits like the earned income tax credit. So there is no need for most taxpayers to file an amended tax return.
- If you HAVE NOT filed your 2020 tax return: The IRS now has guidance on how to report this tax break on your 2020 tax return if you have not already filed.
- Tax deadline moved to May 17. Because of all this havoc, the April 15 deadline for individual tax returns is now May 17. This extension applies only to Form 1040s. First quarter estimated tax payments for the 2021 tax year are still due by April 15.
Be assured you will be informed once the IRS issues further instruction on how to claim your tax break. In the meantime, enjoy the extra tax savings you’ll get sometime in the near future!
New Tax Breaks Benefit Millions
What you need to know
The recently-passed American Rescue Plan Act contains several tax breaks for you and your family. Here are the major provisions of the bill that could mean more money in your pocket during the 2021 tax year.
Child tax credit (CTC)
- The CTC for 2021 increases from $2,000 to $3,000 for kids ages 6 to 17 and $3,600 for kids ages 5 and under.
- To receive the full tax credit your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household).
- If your income is above the aforementioned thresholds, you can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint).
- You can receive up to 50% of your 2021 child tax credit in 6 monthly payments starting July 2021. The IRS is warning, however, that this July start date may be delayed because a computer system still has to be built to handle these monthly payments.
Child and dependent care credit (DCC)
If you and your spouse work and have children in daycare, or have an adult that you care for, you may be eligible for a larger tax credit in 2021.
- You can now spend up to $8,000 in dependent care expenses for one qualifying dependent and get a 50% tax credit. This results in a maximum credit of $4,000 (up from $1,050).
- If you have more than one qualifying dependent, you can spend up to $16,000 in dependent care expenses and get a 50% credit. This results in a maximum credit of $8,000 (up from $2,100).
- To receive the full tax credit, your adjusted gross income must not exceed $125,000.
- Dependents can include people of all ages, not just kids, as long as they meet the dependent qualifications.
Earned income tax credit
- If you’re a household with no kids, the maximum earned income tax credit increases from $543 to $1,502.
- More taxpayers qualify for the credit. The lower age limit for receiving the credit decreases from age 25 to age 19. The upper limit of 65 for receiving the credit is eliminated. There is no upper age limit for 2021.
- You may use either your 2019 income or your 2021 income when calculating your credit to obtain the maximum credit.
- A third round of stimulus payments in the amount of $1,400 is being sent to qualified taxpayers.
- The payment phases out for income over $75,000 for single taxpayers, $112,500 for head of household taxpayers and $150,000 for married couples.
Action to take
- Look for updates on the advance payments for the child tax credit. The IRS is sorting out how to get half of your child tax credit to you in 2021. Stay tuned for updates as to whether the payments will begin in July or if they will be delayed. You may also opt out of this early payment, but will need to wait for instructions on how to do so.
- Consider increasing dependent care expenses. Look ahead to the rest of 2021 and consider if you should increase your dependent care expenses to take advantage of the significant increase in this credit. If you increase your dependent care expenses in 2021, remember you won’t be able to include the same amount of expenses when calculating your credit in 2022, as this tax credit increase is currently for 2021 only.
- Conduct a tax forecast. With the dramatic increase in these credits, you may want to estimate next year’s tax bill. It may make sense to adjust your withholdings to account for a lower tax obligation.
- Be conservative when forecasting your earned income tax credit. It is uncertain how the expanded earned income tax credit will impact those over 65 when you have no children. For example, are Social Security benefits considered earned income when calculating the earned income tax credit? Does the larger standard deduction for those over 65 affect the earned income tax credit calculation? Until clarification is issued by the IRS, you may wish to be conservative about the credit amount you’ll receive.
Don’t Overlook Renters Insurance
Do you rent an apartment or condo? If so, do you have renters insurance to protect your belongings and to cover you against liability claims?
A surprising number of renters don’t bother with insurance. Some assume they’re covered by their landlord’s policy. Wrong! Usually that covers only damage to the building and liability claims against the landlord. Others say their belongings aren’t worth enough to justify the cost. But add up how much it would cost you to replace everything you might lose in a fire and you’ll be surprised. In most cases, the cost of insurance is a small price to pay for the protection you’ll receive.
Renters insurance, sometimes called a tenant policy, typically protects against three things:
- Loss or damage to your personal belongings from fire, theft, etc.
- Liability claims from someone injured in your apartment
- The cost of temporary living expenses if your apartment is made uninhabitable by some catastrophe
When you buy renters insurance, you’ll have to decide the amount and type of coverage. Your agent can help you estimate the value of your belongings. You can either choose “actual cash value” coverage or “replacement value coverage.”
The first pays you the estimated value of items at the time of loss, based on their age and condition. The second pays the cost of replacing items with equivalent new items, up to the maximum value of coverage. The second method will pay you more, but obviously the premium will be higher. Try to identify anything of special value, such as expensive jewelry or electronic equipment. You may need a policy rider to cover the full amount of these items.
A few tips
Bundle for discounts. You may receive a discount if you buy your renters insurance and car insurance from the same company.
Save with roommates. If you have a long-term roommate, ask if you can take out a joint policy instead of two separate ones.
Know when and where kids are covered. If you have children living away at college, check whether they’re covered under your homeowners policy. Once they leave college, though, they’ll need their own insurance.
Take inventory. Create a thorough inventory of your belongings, recording the model and serial number of any equipment and take plenty of photos. This could be invaluable to support your claim if you ever have a loss.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
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