This year’s long list of tax law changes could appear as a surprise on your tax return—if you’re not prepared. To help you out, we have compiled a list of the most important changes for the 2021 tax year. Use this information now to help prevent surprises or frustration later when you file your return.

Stimulus Reconciles in Your Favor

The third stimulus payment the IRS sent in March 2021 must be reconciled on your 2021 tax return since it was an advance tax credit. If your stimulus payment was too small, you’ll get the difference on your return. If your stimulus
payment was too large (more than your 2021 credit), you will not need to repay anything. This is a win-win situation for the taxpayer! You should keep documents related to the stimulus payment for your accountant or provide the total amount you received.

Expect More from Child Tax Credit

The child tax credit jumped from $2,000 to $3,000 per child ages 6 to 17 and to $3,600 per child under age 6. For now, the increase is temporary and will expire after 2021. An additional change is that the credit is refundable. This means you can receive your child tax credit as a refund, even if your earned income is low or you have no earned income. With the increased credit, you could see a bigger refund on your tax return—but only if your income stays the same and you did not receive the advance child tax credit payments. For the 2021 tax year, Gehman Accounting will be implementing a $20 surcharge for all tax returns with child tax credit.

A Word to the Wise on Advance Child Tax Credit

Have you been getting the advance child tax credit payments from the IRS? Keep in mind that your accountant will need to reconcile these payments on your tax return. Since these payments are “borrowed” from the child tax credit, they will lower the amount of credit on your return, which could cause either an increase in tax due or a decrease in your typical refund. The IRS will be sending a letter in January with the total of your advance payments. Save the letter for your accountant or provide the total amount you received. Again, Gehman Accounting will be implementing a $20 surcharge for all 2021 tax returns with child tax credit.

More Credit for Child and Dependent Care

The tax credit for child and dependent care is larger and refundable for 2021. Up to 50% of child care expenses can be counted instead of the usual 35%. The maximum expense allowed is $8,000 for one child and $16,000 for two or more children. This translates to a total credit of either $4,000 or $8,000 depending on the number of children. The credit is also refundable. For example, if your tax bill was $500 and you qualified for $1,000 of child care credit, you would get a $500 refund. Typically, you would lose any credit greater than your tax due.

Less Itemizing for Charitable Deductions

Cash donations to charity are deductible this year even if you don’t itemize them. You can take the standard deduction and still deduct up to $300 per person for donations given in cash. Donated property like a car, food, or furniture is not eligible. For those who are married and filing jointly, the maximum cash deduction is $600. Any taxpayer who itemizes deductions may include charitable donations with their deductions as usual.