Year-end tax planning is always important; however, significant tax law changes occurred for the 2021 tax season. Lynn Martin, a certified public accountant, former owner and chief financial officer of MST Concrete Products, and Clemson University lecturer in the School of Accountancy at the Wilbur O. and Ann Powers College of Business, provides seven of the biggest changes for individual taxpayers:
Expanded child tax credit
The American Rescue Plan raised the child tax credit to $3,000 for families with kids 17 and under for 2021, with an extra $600 for children under age 6.
Millions of Americans received advanced credits, but filers who earned more than expected may need to pay some of it back.
To qualify for the full credit, single filers need a modified adjusted gross income of less than $75,000, and married couples filing together must earn under $150,000.
Increase in standard deduction
The standard deduction for 2021 increased slightly to $25,100 for married taxpayers filing jointly, $18,800 for head of household and $12,550 for single filers. The standard deduction is a specific dollar amount that reduces an individual’s taxable income. IRS lets a filer take the standard deduction on a no-questions-asked basis.
They can either take the standard deduction or itemized deductions on their tax return, whichever is higher, but they can’t take both.
Itemized deductions include expenses for home mortgage interest, charitable contributions, state income taxes paid, real estate and personal property taxes, and certain medical expenses.
Taxpayers looking forward to a year-end charitable donation may take advantage of a deduction for cash contributions even if they don’t itemize deductions on their federal tax return.
For 2021, single filers may claim a tax break for cash donations up to $300, and married couples may get up to $600 (extended from 2020).
Most Americans don’t have enough itemized deductions to exceed the increased standard deduction, and it’s been difficult to claim the charitable deduction. The 2021 extension is a nice tax break for taxpayers who don’t itemize.
No taxes are owed on forgiven student loans
If a filer was able to get some or all of their student loans forgiven in 2021, the forgiven amount is no longer subject to tax. Prior to the American Rescue Plan, forgiven student loan balances were added to their income and taxed in the year forgiven.
Now, the new law prevents forgiven postsecondary education loans from being taxed through 2025.
Unemployment benefits are fully taxable again
The American Rescue Plan gave taxpayers a temporary tax break on up to $10,200 (single filers) of unemployment benefits for 2020. This tax exemption was not renewed, which means that if they collected any unemployment benefits for 2021, they are fully taxable when filing this year.
Required minimum distributions
Another change for 2021 is the return of required minimum distributions (amounts that must be withdrawn from most retirement accounts by a certain age). RMDs were waived in 2020.
They should have been taken out by December 31. If they weren’t, the penalties are severe: 50 percent of the amount that should have been taken out. For example, if Sam needed to take out $20,000 and skipped the distribution, he would owe a penalty of $10,000.
If 2021 was the first year a filer was required to take a minimum distribution, they have until April 1, 2022, to take that first distribution. However, the first distribution is the ONLY one that they may postpone after December 31. In other words, if they failed to take their first distribution in 2021, they will need to take two distributions in 2022 — the one required for 2021 by April 1 and the one required by December 31 for 2022.
Taxation of crypto-assets
The laws around how crypto taxes work are fairly new and will continue to evolve along with this new technology. It is VERY important to consult an expert if a filer had profits (or losses) from any crypto asset-related activities this year — and to plan ahead for future years as well — if crypto-assets make up a sizable part of their investments.
Each individual trading in crypto-assets will enter into different transactions and will be subject to the tax laws of their specific jurisdiction; however, the basic crypto-asset tax rules a filer should be aware of are:
- Trading from crypto-asset to currency like USD is a taxable event.
- Trading from one crypto-asset to another crypto-asset (e.g.,from bitcoin to ethereum) is also a taxable event.
- Spending crypto-assets on goods or services is a taxable event.
- A transfer of the same crypto-asset from a wallet address to another wallet address is not considered a taxable event, but a filer should still maintain a record of the transaction.
- Selling coins or tokens that were received from airdrops, farming, staking rewards or mining is considered a taxable event.
- Selling coins or tokens that were airdropped via a fork (e.g., bitcoin cash received from the bitcoin fork) is considered a taxable event.
- Trying to hide crypto-assets or profits is considered tax evasion.
- Capital losses can sometimes be claimed on crypto-assets sold at a loss.
- Businesses based on staking, mining or using crypto have unique guidelines.
- Holding crypto-assets without selling is not considered a taxable event.
These are some of the rules. There are other detailed rules and regulations around crypto taxes that any serious investor, trader, farmer, staker or miner should know.
If a filer took part in anything other than simply buying crypto to hold in a wallet, they should highly consider discussing their potential tax liabilities with a professional. While the laws will continue to develop, one thing is clear: The IRS expects them to make a good-faith effort in reporting crypto-asset activities.
April 18, this year’s tax deadline, is approaching quickly and will soon bring this tax season to a close. As Martin says, it’s never too early to start preparing for next year’s tax return.
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