If you paid for your child’s daycare, health insurance, or school fees in 2021, you could be eligible for a big credit on your 2021 taxes, even if you haven’t qualified in previous years. .
A number of credits have been enhanced for the 2021 tax year under pandemic legislation and will become more restrictive on 2022 or 2023 taxes again. usual, but are available to more taxpayers whose income, age or other circumstances have made them ineligible in previous years.
Credits are much more valuable than deductions because they reduce a tax bill dollar for dollar. Deductions reduce taxable income and generally only constitute a benefit if their total exceeds the standard deduction, which for 2021 is $12,550 for single filers and $25,100 for couples.
Many people are already aware of the expansion of child tax credits and refunds for 2021 as part of the US bailout. The Child Tax Credit was increased from $2,000 per child under 17 to $3,000, plus an additional $600 for children under 6. The 2021 stimulus credit is $1,400 per person. These credits were paid in part throughout the last year and the Internal Revenue Service followed up with notices in the mail. There is a lot of confusion about how to claim them fully on 2021 returns.
But don’t let these high-profile tax credits overshadow a long list of lesser-known credits, says Mark Luscombe, senior federal tax analyst at Wolters Kluwer: “Historically, when there are new or changed provisions in the tax code , many people do not claim what they are entitled to.
Here are five credits – and only one deduction that can be claimed alongside the standard deduction – that can help you reduce your tax burden in 2021:
Credit for children and childcare
The maximum child and child care credit has increased from $1,050 to $4,000 for one child and from $2,100 to $8,000 for two or more children, for the 2021 tax year only.
Additionally, more taxpayers can claim the full credit because the income threshold is more than eight times higher on 2021 taxes: the credit begins to phase out when adjusted gross income reaches $125,000. For the previous tax year, the credit began to phase out on income of $15,000.
But there is bad news for high earners. In previous years, the credit was never reduced to zero; those earning over $400,000 could claim 20% of eligible expenses as a credit. Now, the credit disappears completely for income over $438,000.
The credit is for taxpayers who need to pay for dependent care to enable them to work, seek employment or attend school. Dependents are defined as a child under the age of 13, or any age if unable to care for themselves.
To claim the credit, taxpayers must have the tax ID numbers of their child care providers, Luscombe says. “If you’ve used a variety of babysitters, it could be a record-keeping issue.”
Health insurance premium credit
While the health insurance premium credit was created years ago For low-income taxpayers, the US bailout, passed in March last year, removed income caps for eligibility for the 2021 and 2022 tax years.
The credit can be claimed by individuals or couples who purchase health insurance through one of the exchanges created under the Affordable Care Act.
The credit will vary depending on the taxpayer’s income and the cost of premiums. For 2021, the credit may be sufficient to ensure that your premium costs will not exceed 8.5% of household income.
For example, the annual health plan premium for a couple earning $150,000 with three children could be $14,443, or 9.6% of income, according to the Kaiser Family Credit Calculator. Foundation. This family would be entitled to a tax credit of $1,683 to reduce its expenses to $12,750 per year, or 8.5% of its income.
Tax credits for higher education:
If you pay tuition and university fees, consider your eligibility for two college credits. The bad news is that you have to choose; you cannot use both for a student’s expenses.
The most accessible is the US Opportunity Tax Credit for couples with incomes up to $180,000 and singles earning up to $90,000. It offsets the costs of degree-seeking students enrolled in courses at least half-time and is capped at $2,500 per student. The credit is equal to 100% of expenses up to $2,000 and 25% of the next $2,000.
Another option is the Lifetime Learning Credit, equal to 20% of annual education expenses up to $10,000, up to $2,000 per tax return. The income eligibility limit for couples is $138,000 and for singles is $69,000. These caps increased from $118,000 and $59,000, respectively, in 2020. This credit can offset expenses for undergraduate and graduate studies, or courses to improve job skills.
Labor income tax credit
The earned income tax credit, designed to benefit working taxpayers, has nearly tripled for the 2021 tax year for taxpayers without dependents, and eligibility requirements have also been eased.
Prior to 2021, taxpayers without dependent children could only claim this credit if they were between the ages of 24 and 65. This meant that a grandparent over 65 caring for a grandchild could not claim the earned income tax credit, Luscombe says.
This only changed for the 2021 tax year: as part of pandemic relief efforts, anyone age 19 or older, whether or not they have dependent children, can claim the credit. if his income is below certain thresholds.
The credit limit and income thresholds vary depending on the number of dependent children in a family.
For example, the credit for childless taxpayers has been reduced from $538 to $1,502 for the 2021 tax year. For eligibility, income for couples cannot exceed $27,380 and for singles, not over $21,430.
The credit when taxpayers have three or more children has been increased from $6,660 to $6,720 and is available when income does not exceed $57,414 for couples and $51,464 for singles.
Another change for 2021 only: Taxpayers can choose to base this credit on their 2019 income as long as it was higher than 2021. This may result in a higher credit amount.
Improved deductions for cash contributions
Normally, deductions for charitable contributions can only be claimed if you itemize the deductions and do not claim the standard deduction. But the Taxpayers Certainty and Disaster Relief Act, passed in December 2020, allows taxpayers to deduct up to $300 in cash gifts — or $600 per couple — on 2021 returns if they don’t itemize and ask the place the standard deduction.
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