Article Highlights

Prior Filed Returns with Unemployment Income
American Rescue Plan’s $10,200 Exclusion
IRS Automatic Adjustment
Refund Application
When an Amended Return Might Be Required

The IRS announced on March 31, that it will take steps to automatically refund money this spring and summer to people who filed their tax return reporting unemployment compensation before the recent law change made by the American Rescue Plan Act. The American Rescue Plan Act, signed on March 11, allows each taxpayer who earned less than $150,000 in modified adjusted gross income to exclude up to $10,200 of unemployment compensation from taxation. Since it applies to each taxpayer, married couples where both spouses received unemployment benefits may be able to exclude up to $20,400 if married filing status. The legislation excludes only 2020 unemployment benefits from taxes. Because the change occurred after some people filed their taxes, the IRS will take steps in the spring and summer to make the appropriate change to the returns of these individuals, which may result in a refund. The first refunds are expected to be made in May and will continue into the summer. For those taxpayers who already have filed and figured their tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation and tax. Any resulting overpayment of tax will be either refunded or applied to other outstanding taxes owed. For those who have already filed, the IRS will do these recalculations in two phases, starting with those taxpayers eligible for the up to $10,200 exclusion. The IRS will then adjust returns for those married filing jointly taxpayers who are eligible for the up to $20,400 exclusion and others with more complex returns. There is no need for taxpayers to file an amended return unless the calculations make the taxpayer newly eligible for additional federal credits and deductions not already included on the original tax return. For example, the IRS can adjust returns for those taxpayers who claimed the Earned Income Tax Credit (EITC) and, because the exclusion changed the income level, may now be eligible for an increase in the EITC amount which may result in a larger refund. However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but now are eligible because the exclusion changed their income. If you have questions, please give this office a call.

Article Highlights:

Your Federal Tax Refund Status Can Be Checked Online
Delay When Claiming Earned Income Tax Credit or Additional Child Tax Credit • ‘Where’s My Refund?’
Refunds Are Generally Issued Within 21 Days of E-Filing
Paper Filed Return Will Take Longer
Information Needed to Check Refund Status
Direct Deposit Provides the Quickest Refunds
When to Call the IRS

If your 2020 federal return has already been filed and you are due a refund, you can check the status of your refund online. Note: if you claimed the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC), the IRS will not issue refunds until the first week of March provided you e-filed, chose your refund to be direct deposited and no issues were found with your refund. ‘Where’s My Refund?’ is an interactive tool on the IRS website at IRS.gov. Whether you have opted for direct deposit into one account, split your refund among several accounts, or asked the IRS to mail you a check, ‘Where’s My Refund?’ will give you online access to your refund information nearly 24 hours a day, 7 days a week. If you e-file, you can get refund information within 24 hours after the IRS has acknowledged receipt of your return. Generally, refunds for e-filed returns are issued within 21 days. However, if you file a paper return, there is no assurance when your refund information will be available. In the past, the IRS said it would be available within four weeks of filing. However, due to COVID-19 delays, it is taking the IRS longer to process paper-filed returns, although they do process them in the order received. So, expect delays and do not submit a second return. To be on the safe side, be sure to obtain proof of mailing from the USPS. When checking the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter:

Your Social Security number (or Individual Taxpayer Identification Number);
Your filing status (single, married filing joint return, married filing separate return, head of household, or qualifying widow(er)); and
The exact refund amount shown on your tax return.

Once you have entered your personal information, one of several responses may come up, including the following:

Acknowledgment that your return has been received and is in processing.
The mailing date or direct-deposit date of your refund.
Notice that the IRS has been unable to deliver your refund because of an incorrect address. You can update your address online using the feature on ‘Where’s My Refund?’

The quickest refunds are via direct deposit. Allow additional time for checks to be processed through the mail. When should you call the IRS if you don’t receive your refund? You should only call if it has been:

21 days or more since your return was e-filed,
6 weeks or more since you mailed your return, or
When “Where’s My Refund” tells you to contact the IRS.

‘Where’s My Refund?’ also includes links to customized information based on your specific situation. The links will guide you through the steps to resolve any issues affecting your refund. Many states also have a Where’s My Refund? feature on their tax department’s website. Google Where’s My Refund with the name of the state. If you have questions related to your refund, please give this office a call.

Article Highlights:

Non-refundable vs. Refundable Credit
Childcare Credit
Earned Income Tax Credit
Child & Dependent Tax Credit
Saver’s Credit
Vehicle Tax Credits
Adoption Credit
Residential Energy-Efficient Property Credit

Tax credits are a tax benefit that offsets your actual tax liability, as opposed to a tax deduction, which reduces your income. Congress provides tax credits to individual taxpayers for a number of reasons, including as a form of assistance for lower-income taxpayers, to stimulate employment, and to stimulate certain investments, among other things. Tax credits come in two types: non-refundable and refundable. A non-refundable credit can only reduce your tax liability to zero; any excess is either carried forward or is simply lost. In the case of a refundable credit, if there is excess after reducing your tax liability to zero, the excess is refundable. The following is a summary of some of the tax credits available to individual taxpayers: Childcare Credit – Parents who work or are looking for work often must arrange for care of their children during working hours or while searching for work. If this describes your situation and your children requiring care are under 13 years of age, you may qualify for a childcare tax credit. For 2020, The credit ranges from 20% to 35% of non-reimbursed expenses, based upon your income, with the higher percentages applying to lower-income taxpayers and the lower percentages applying to higher-income taxpayers.

Applicable Percentage of AGI for the Childcare Credit

AGI Over
But Not Over
Applicable Percent
AGI Over
But Not Over
Applicable Percent

0
15,000
35
29,000
31,000
27

15,000
17,000
34
31,000
33,000
26

17,000
19,000
33
33,000
35,000
25

19,000
21,000
32
35,000
37,000
24

21,000
23,000
31
37,000
39,000
23

23,000
25,000
30
39,000
41,000
22

25,000
27,000
29
41,000
43,000
21

27,000
29,000
28
43,000
No Limit
20

The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more, and the credit is non-refundable, which means it can only reduce your tax to zero, and the excess is lost.
As an example, say your adjusted gross income (AGI) is between $33,000 and $35,000. Your credit percentage would be 25%. If you paid childcare expenses of $4,000 for two children under the age of 13, your tax credit would be $1,000 ($4,000 x 25%). If your tax for the year was $5,000, the credit would reduce that tax to $4,000. On the other hand, if your tax for the year was $800, the credit would reduce your tax to zero, and the $200 excess credit would be lost.
This credit also applies when a taxpayer or spouse is disabled or a full-time student, in which case special ‘earned income’ allowances are provided for months when the taxpayer or spouse is disabled or a full-time student. Please call this office for additional details if this situation applies in your case.
Credit Increased for 2021 – The American Rescue Plan Act increases the credit percentage to 50%, based on expenses of up to $8,000 for one child under the age of 13 and $16,000 for two or more. The credit begins to phaseout for taxpayers with AGIs of $125,000. Unlike other years, credit is refundable.
Earned Income Tax Credit (EITC) – Congress established the EITC as an income supplement for working individuals in lower-paying employment. If you qualify, it could be worth as much as $6,660 in 2020. It is a refundable credit. The EITC is based on the amount of your earned income (income from work for wages and/or self-employment) and whether there are qualifying children in your household. COVID-19 tax relief legislation passed late in 2020 allows you to elect to use your 2019 earned income to figure your 2020 EITC if your 2019 earned income is more than your 2020 earned income. Qualifying children are those who live with you for over half the year, are related, and are under the age of 19 or a full-time student under the age of 24. The credit increases as your earned income increases. The table below shows the earned income at which the maximum credit is achieved for 2020 and 2021.

Qualifying Children
Earned Income
Maximum Credit
Earned Income
Maximum Credit

Year

2020

2021

None
$7,030
$538
$9,820
$1,502

1
$10,540
$3,584
$10,640
$3,618

2
$14,800
$5,920
$14,950
$5,980

3 or more
$14,800
$6,660
$14,950
$6,728

The credit amount phases out after reaching the maximum based on filing status and number of qualifying children. The phase-out ranges for 2020 and 2021 are shown in the table below.

Qualifying Children
Filing Status
Phase-out Range
Phase-out Range

Year
–
2020
2021

None
Married Filing Joint
$14,680–21,710
$17,550–27,370

–
Others
$8,790–15,820
$11,610–21,430

1
Married Filing Joint
$25,220–47,646
$25,470–48,108

–
Others
$19,330–41,756
$19,520–42,158

2
Married Filing Joint
$25,220–53,330
$25,470–53,865

–
Others
$19,330–47,444
$19,520–47,915

3 or more
Married Filing Joint
$25,220–56,844
$25,470–57,414

–
Others
$19,330–50,954
$19,520–51,464

In addition, there are some qualification requirements: you, your spouse (if married and filing jointly), and each qualifying child must have a valid Social Security number, and you cannot use the filing status married filing separately. You cannot be a qualifying child of another person, your investment income for 2020 cannot exceed $3,650 ($10,000 in 2021) and you cannot exclude earned income from working abroad. If you do not have a qualifying child, you must be at least age 25 but under 65 at the end of the year. However special rules apply for 2021. Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it, simply because they don’t understand the criteria. If you qualified for but failed to claim the credit on your return for 2017 (if filed by April 15, 2021), 2018, 2019, and/or 2020, you may still claim it for those years by filing an amended return or an original return, if you have not previously filed. Please call for assistance. Members of the military can elect to include their nontaxable combat pay in their earned income for the earned income credit. If that election is made, the military member must include in their earned income all nontaxable combat pay they received for the year.
The American Rescue Plan Act – Make a one-year increase in the EITC for childless adults from roughly $530 to $1,502 and to increase the income limit for the credit for these individuals from roughly $16,000 to $21,000. the age cap has been eliminated so that older workers without a qualifying child can claim the credit (currently a childless individual cannot claim the credit after reaching age 65). The legislation also removed the age cap, as well as lower the minimum age to claim the childless EITC from 25 to 19 (except for certain full-time students). Loosened the requirements for child identification numbers for certain childless filers, and for all eligible filers allows 2019’s earned income to be used instead of 2021’s, if 2021’s earned income is less than 2019’s.
Child & Dependent Tax Credit – As an aid to families with children, the tax code provides a child tax credit of $2,000 for each qualified child. A qualified child for this tax credit is one who is under age 17 at the end of the year, is related, is not self-supporting, lived with you over half the year, has a Social Security number, and is claimed as your dependent. The refundable portion of this credit is equal to 15% of your earned income but limited to $1,400. You are also able to claim a non-refundable credit of $500 for each of your dependents who do not qualify for the child credit. For both the child and dependent credits, the credit begins to phase out for married taxpayers with an AGI of $400,000 ($200,000 for others).
The American Rescue Plan Act – For a period of one year, 2021, the credit will include children up through age 17 in the credit, increase the Child Tax Credit to $3,000 ($3,600 for children under the age of 6), make the credit fully refundable.
Saver’s Credit – Congress created the non-refundable saver’s credit as a means of stimulating retirement savings among lower-income individuals. It helps to offset part of the first $2,000 that workers voluntarily contribute to traditional or Roth individual retirement arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. The saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. The credit is a percentage of the first $2,000 contributed to an eligible retirement plan. The following table illustrates the percentage based upon filing status and AGI for 2021.

Adjusted Gross Income Range

Credit

Married Filing Joint
Head of Household
Others
Percentage

$0–$39,500
$0–$29,625
$0–$19,750
50

$39,501–$42,500
$29,626–$32,250
$19,751–$21,500
20

$42,501–$66,000
$32,251–$49,500
$21,501–$33,000
10

$66,001 & Over
$49,501 & Over
$33,000 & Over
No Credit

Example – Eric and Heather are married, both age 25, and filing a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for 2021 was $38,000. The credit is computed as follows:

Eric’s 401(k) contribution was $3,000, but only the first$2,000 can be used
$2,000

Heather’s IRA contribution was $500, so it can all be used
$500

Total qualifying contributions
$2,500

Credit percentage for a MFJ AGI of $38,000from the table
X .50

Non-refundable saver’s credit
$1,250

Vehicle Tax Credits – If you are considering purchasing a new car or light truck (less than 14,000 pounds), don’t overlook the fact that Congress allows a substantial tax credit for the purchase of the many electric vehicles currently being offered for sale, providing a tax credit worth as much as $7,500. To be eligible for the credit, you must acquire the vehicle for use or lease and not for resale. Additionally, the vehicle’s original use must commence with you, and you must use the vehicle predominantly in the United States. Congress did include a phase-out provision for this credit that applies by vehicle manufacturer. The credit begins to phase out once the manufacturer sells 200,000 electric vehicles. To see if the make and model you are considering qualify, visit the IRS website. The credit is available whether you use the vehicle for business, personally, or a combination of both. The prorated portion of the credit that applies to business use becomes part of the general business credit, and any amount not used on your return for the year when you purchase the vehicle can be carried back to the previous year and then carried forward until used up, but for no more than 20 years. The personal portion is non-refundable. Adoption Credit – If you are an adoptive parent or are planning to adopt a child, you may qualify for the adoption credit. The amount of the credit is based on the expenses incurred that are directly related to the adoption of a child under the age of 18 or a person who is physically or mentally incapable of self-care. This is a 1:1 credit for each dollar of qualified expenses up to the maximum for the year, which is $14,440 for 2021 (up from $14,300 for 2020). The credit is non-refundable, which means it can only reduce your tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be carried forward for up to five years to reduce your future tax liability. Qualified expenses generally include adoption fees, court costs, attorney fees, and travel expenses that are reasonable, necessary and directly related to the child’s adoption, and they may be for both domestic and foreign adoptions; however, expenses related to adopting a spouse’s child are not eligible for this credit. When adopting a child with special needs, the full credit is allowed, whether or not any qualified expenses were incurred. The credit is phased out for higher-income taxpayers. For 2021, the AGI (computed without foreign-income exclusions) phase-out threshold is $216,660, and the credit is completely phased out at the AGI of $256,660. Unlike most phase-outs, this one is the same regardless of filing status. However, taxpayers filing as married filing separately cannot claim the credit. Residential Energy Efficient Property (Solar) Credit – This tax credit was created to reward individuals for investing in equipment that uses alternative energy sources to create electrical power for use in a taxpayer’s home or second home. It includes alternative power sources such as fuel cells, wind energy, and geothermal heat pumps, for which the credit expires after 2021. However, the credit is most commonly associated with the home solar credit, which is equal to 26% of the cost of the solar electric system for an individual’s primary and second homes, with no limit on the cost of the solar system. Even though the credit is non-refundable, any amount not used in the first year carries over to subsequent credit years. The credit percentage is phased-out as shown in the table.

Home Energy Credit Percentage

Year
2020 Through 2022
2023
2024 and After

Percentage
26
22
None

Before deciding to add a solar electric system to your home, you need to consider if you can actually afford the system and whether it is worth having one, after taking into account the system’s cost, the financing interest, the reduced electricity costs, and the tax credit. You should make an objective analysis without pressure from a salesperson. These credits are substantial, but the one thing salespeople and contractors typically fail to mention is that the credit is not refundable, and even though it carries over through 2023, there is a good chance you will never use it all. It may be appropriate for you to consult with this office before entering into a contract for a home solar system. Electric Motorcycle Credit – Taxpayers that purchase a qualifying electric 2-wheel motorcycle will qualify for a non-refundable credit equal to 10% of the cost, maximum credit $2,500 per vehicle. A qualifying vehicle must meet the following requirements.

Propelled by a rechargeable battery with a capacity of at least 2.5 kilowatt hours,
Capable of being re-charged from an external source,
Highway vehicle capable of 45 mph or more,
Manufactured primarily for use on public streets, roads and highways,
Gross weight is less than 14,000 pounds,
Original use (lease or purchase) begins with the taxpayer, acquired after 2014 and before 2022.

If you have questions or would like additional details related to any of these credits, please give the office a call.

Article Highlights:

Non-refundable vs. Refundable Credit
Childcare Credit
Earned Income Tax Credit
Child & Dependent Tax Credit
Saver’s Credit
Vehicle Tax Credits
Adoption Credit
Residential Energy-Efficient Property Credit

Tax credits are a tax benefit that offsets your actual tax liability, as opposed to a tax deduction, which reduces your income. Congress provides tax credits to individual taxpayers for a number of reasons, including as a form of assistance for lower-income taxpayers, to stimulate employment, and to stimulate certain investments, among other things. Tax credits come in two types: non-refundable and refundable. A non-refundable credit can only reduce your tax liability to zero; any excess is either carried forward or is simply lost. In the case of a refundable credit, if there is excess after reducing your tax liability to zero, the excess is refundable. The following is a summary of some of the tax credits available to individual taxpayers: Childcare Credit – Parents who work or are looking for work often must arrange for care of their children during working hours or while searching for work. If this describes your situation and your children requiring care are under 13 years of age, you may qualify for a childcare tax credit. For 2020, The credit ranges from 20% to 35% of non-reimbursed expenses, based upon your income, with the higher percentages applying to lower-income taxpayers and the lower percentages applying to higher-income taxpayers.

Applicable Percentage of AGI for the Childcare Credit

AGI Over
But Not Over
Applicable Percent
AGI Over
But Not Over
Applicable Percent

0
15,000
35
29,000
31,000
27

15,000
17,000
34
31,000
33,000
26

17,000
19,000
33
33,000
35,000
25

19,000
21,000
32
35,000
37,000
24

21,000
23,000
31
37,000
39,000
23

23,000
25,000
30
39,000
41,000
22

25,000
27,000
29
41,000
43,000
21

27,000
29,000
28
43,000
No Limit
20

The maximum expense amount allowed is $3,000 for one child and $6,000 for two or more, and the credit is non-refundable, which means it can only reduce your tax to zero, and the excess is lost.
As an example, say your adjusted gross income (AGI) is between $33,000 and $35,000. Your credit percentage would be 25%. If you paid childcare expenses of $4,000 for two children under the age of 13, your tax credit would be $1,000 ($4,000 x 25%). If your tax for the year was $5,000, the credit would reduce that tax to $4,000. On the other hand, if your tax for the year was $800, the credit would reduce your tax to zero, and the $200 excess credit would be lost.
This credit also applies when a taxpayer or spouse is disabled or a full-time student, in which case special ‘earned income’ allowances are provided for months when the taxpayer or spouse is disabled or a full-time student. Please call this office for additional details if this situation applies in your case.
Credit Increased for 2021 – The American Rescue Plan Act increases the credit percentage to 50%, based on expenses of up to $8,000 for one child under the age of 13 and $16,000 for two or more. The credit begins to phaseout for taxpayers with AGIs of $125,000. Unlike other years, credit is refundable.
Earned Income Tax Credit (EITC) – Congress established the EITC as an income supplement for working individuals in lower-paying employment. If you qualify, it could be worth as much as $6,660 in 2020. It is a refundable credit. The EITC is based on the amount of your earned income (income from work for wages and/or self-employment) and whether there are qualifying children in your household. COVID-19 tax relief legislation passed late in 2020 allows you to elect to use your 2019 earned income to figure your 2020 EITC if your 2019 earned income is more than your 2020 earned income. Qualifying children are those who live with you for over half the year, are related, and are under the age of 19 or a full-time student under the age of 24. The credit increases as your earned income increases. The table below shows the earned income at which the maximum credit is achieved for 2020 and 2021.

Qualifying Children
Earned Income
Maximum Credit
Earned Income
Maximum Credit

Year

2020

2021

None
$7,030
$538
$9,820
$1,502

1
$10,540
$3,584
$10,640
$3,618

2
$14,800
$5,920
$14,950
$5,980

3 or more
$14,800
$6,660
$14,950
$6,728

The credit amount phases out after reaching the maximum based on filing status and number of qualifying children. The phase-out ranges for 2020 and 2021 are shown in the table below.

Qualifying Children
Filing Status
Phase-out Range
Phase-out Range

Year
–
2020
2021

None
Married Filing Joint
$14,680–21,710
$17,550–27,370

–
Others
$8,790–15,820
$11,610–21,430

1
Married Filing Joint
$25,220–47,646
$25,470–48,108

–
Others
$19,330–41,756
$19,520–42,158

2
Married Filing Joint
$25,220–53,330
$25,470–53,865

–
Others
$19,330–47,444
$19,520–47,915

3 or more
Married Filing Joint
$25,220–56,844
$25,470–57,414

–
Others
$19,330–50,954
$19,520–51,464

In addition, there are some qualification requirements: you, your spouse (if married and filing jointly), and each qualifying child must have a valid Social Security number, and you cannot use the filing status married filing separately. You cannot be a qualifying child of another person, your investment income for 2020 cannot exceed $3,650 ($10,000 in 2021) and you cannot exclude earned income from working abroad. If you do not have a qualifying child, you must be at least age 25 but under 65 at the end of the year. However special rules apply for 2021. Even though this credit can be worth thousands of dollars to a low-income family, the IRS estimates as many as 25 percent of people who qualify for the credit do not claim it, simply because they don’t understand the criteria. If you qualified for but failed to claim the credit on your return for 2017 (if filed by April 15, 2021), 2018, 2019, and/or 2020, you may still claim it for those years by filing an amended return or an original return, if you have not previously filed. Please call for assistance. Members of the military can elect to include their nontaxable combat pay in their earned income for the earned income credit. If that election is made, the military member must include in their earned income all nontaxable combat pay they received for the year.
The American Rescue Plan Act – Make a one-year increase in the EITC for childless adults from roughly $530 to $1,502 and to increase the income limit for the credit for these individuals from roughly $16,000 to $21,000. the age cap has been eliminated so that older workers without a qualifying child can claim the credit (currently a childless individual cannot claim the credit after reaching age 65). The legislation also removed the age cap, as well as lower the minimum age to claim the childless EITC from 25 to 19 (except for certain full-time students). Loosened the requirements for child identification numbers for certain childless filers, and for all eligible filers allows 2019’s earned income to be used instead of 2021’s, if 2021’s earned income is less than 2019’s.
Child & Dependent Tax Credit – As an aid to families with children, the tax code provides a child tax credit of $2,000 for each qualified child. A qualified child for this tax credit is one who is under age 17 at the end of the year, is related, is not self-supporting, lived with you over half the year, has a Social Security number, and is claimed as your dependent. The refundable portion of this credit is equal to 15% of your earned income but limited to $1,400. You are also able to claim a non-refundable credit of $500 for each of your dependents who do not qualify for the child credit. For both the child and dependent credits, the credit begins to phase out for married taxpayers with an AGI of $400,000 ($200,000 for others).
The American Rescue Plan Act – For a period of one year, 2021, the credit will include children up through age 17 in the credit, increase the Child Tax Credit to $3,000 ($3,600 for children under the age of 6), make the credit fully refundable.
Saver’s Credit – Congress created the non-refundable saver’s credit as a means of stimulating retirement savings among lower-income individuals. It helps to offset part of the first $2,000 that workers voluntarily contribute to traditional or Roth individual retirement arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. The saver’s credit is available in addition to any other tax savings that apply as a result of contributing to retirement plans. The credit is a percentage of the first $2,000 contributed to an eligible retirement plan. The following table illustrates the percentage based upon filing status and AGI for 2021.

Adjusted Gross Income Range

Credit

Married Filing Joint
Head of Household
Others
Percentage

$0–$39,500
$0–$29,625
$0–$19,750
50

$39,501–$42,500
$29,626–$32,250
$19,751–$21,500
20

$42,501–$66,000
$32,251–$49,500
$21,501–$33,000
10

$66,001 & Over
$49,501 & Over
$33,000 & Over
No Credit

Example – Eric and Heather are married, both age 25, and filing a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for 2021 was $38,000. The credit is computed as follows:

Eric’s 401(k) contribution was $3,000, but only the first$2,000 can be used
$2,000

Heather’s IRA contribution was $500, so it can all be used
$500

Total qualifying contributions
$2,500

Credit percentage for a MFJ AGI of $38,000from the table
X .50

Non-refundable saver’s credit
$1,250

Vehicle Tax Credits – If you are considering purchasing a new car or light truck (less than 14,000 pounds), don’t overlook the fact that Congress allows a substantial tax credit for the purchase of the many electric vehicles currently being offered for sale, providing a tax credit worth as much as $7,500. To be eligible for the credit, you must acquire the vehicle for use or lease and not for resale. Additionally, the vehicle’s original use must commence with you, and you must use the vehicle predominantly in the United States. Congress did include a phase-out provision for this credit that applies by vehicle manufacturer. The credit begins to phase out once the manufacturer sells 200,000 electric vehicles. To see if the make and model you are considering qualify, visit the IRS website. The credit is available whether you use the vehicle for business, personally, or a combination of both. The prorated portion of the credit that applies to business use becomes part of the general business credit, and any amount not used on your return for the year when you purchase the vehicle can be carried back to the previous year and then carried forward until used up, but for no more than 20 years. The personal portion is non-refundable. Adoption Credit – If you are an adoptive parent or are planning to adopt a child, you may qualify for the adoption credit. The amount of the credit is based on the expenses incurred that are directly related to the adoption of a child under the age of 18 or a person who is physically or mentally incapable of self-care. This is a 1:1 credit for each dollar of qualified expenses up to the maximum for the year, which is $14,440 for 2021 (up from $14,300 for 2020). The credit is non-refundable, which means it can only reduce your tax liability to zero (as opposed to potentially resulting in a cash refund). But the good news is that any unused credit can be carried forward for up to five years to reduce your future tax liability. Qualified expenses generally include adoption fees, court costs, attorney fees, and travel expenses that are reasonable, necessary and directly related to the child’s adoption, and they may be for both domestic and foreign adoptions; however, expenses related to adopting a spouse’s child are not eligible for this credit. When adopting a child with special needs, the full credit is allowed, whether or not any qualified expenses were incurred. The credit is phased out for higher-income taxpayers. For 2021, the AGI (computed without foreign-income exclusions) phase-out threshold is $216,660, and the credit is completely phased out at the AGI of $256,660. Unlike most phase-outs, this one is the same regardless of filing status. However, taxpayers filing as married filing separately cannot claim the credit. Residential Energy Efficient Property (Solar) Credit – This tax credit was created to reward individuals for investing in equipment that uses alternative energy sources to create electrical power for use in a taxpayer’s home or second home. It includes alternative power sources such as fuel cells, wind energy, and geothermal heat pumps, for which the credit expires after 2021. However, the credit is most commonly associated with the home solar credit, which is equal to 26% of the cost of the solar electric system for an individual’s primary and second homes, with no limit on the cost of the solar system. Even though the credit is non-refundable, any amount not used in the first year carries over to subsequent credit years. The credit percentage is phased-out as shown in the table.

Home Energy Credit Percentage

Year
2020 Through 2022
2023
2024 and After

Percentage
26
22
None

Before deciding to add a solar electric system to your home, you need to consider if you can actually afford the system and whether it is worth having one, after taking into account the system’s cost, the financing interest, the reduced electricity costs, and the tax credit. You should make an objective analysis without pressure from a salesperson. These credits are substantial, but the one thing salespeople and contractors typically fail to mention is that the credit is not refundable, and even though it carries over through 2023, there is a good chance you will never use it all. It may be appropriate for you to consult with this office before entering into a contract for a home solar system. Electric Motorcycle Credit – Taxpayers that purchase a qualifying electric 2-wheel motorcycle will qualify for a non-refundable credit equal to 10% of the cost, maximum credit $2,500 per vehicle. A qualifying vehicle must meet the following requirements.

Propelled by a rechargeable battery with a capacity of at least 2.5 kilowatt hours,
Capable of being re-charged from an external source,
Highway vehicle capable of 45 mph or more,
Manufactured primarily for use on public streets, roads and highways,
Gross weight is less than 14,000 pounds,
Original use (lease or purchase) begins with the taxpayer, acquired after 2014 and before 2022.

If you have questions or would like additional details related to any of these credits, please give the office a call.

Waiting for a tax refund and it never arrives? It may be because you have outstanding federal or state debts. Learn how to be more proactive about debt payments to get money returned to your bank account.
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Article Highlights:

Phone Scams
E-Mail Phishing
What’s in Your Purse or Wallet?
What You Should Never Do
Fake Charities
Protecting Against Identity Theft

Thieves use taxpayers’ natural fear of the IRS and other government entities to ply their scams, including e-mail and phone scams, to steal your money. They also use phishing schemes to trick you into divulging your SSN, date of birth, account numbers, passwords and other personal data that allow them to scam the IRS and others using your name and destroy your credit in the process. They are clever and are always coming up with new and unique schemes to trick you. These scams have reached epidemic proportions, and this article will hopefully provide you with the knowledge to identify scams and avoid becoming a victim. The very first thing you should be aware of is that the IRS never initiates contact in any other way than by U.S. mail. So, if you receive an e-mail or a phone call out of the blue with no prior contact, then it is a scam. DO NOT RESPOND to the e-mail or open any links included in the e-mail. If it is a phone call, simply HANG UP. Additionally, it is important for taxpayers to know that the IRS:

Never asks for a credit card, debit card, or prepaid card information over the telephone.
Never insists that taxpayers use a specific payment method to pay tax obligations.
Never requests immediate payment over the telephone.
Will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior written notification of IRS enforcement action involving IRS tax liens or levies. Don’t be intimidated by threats of immediate arrest.

Phone Scams – Potential phone scam victims may be told that they owe money that must be paid immediately to the IRS or, on the flip side, that they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy. Other characteristics of these scams include:

Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
Scammers may be able to recite the last four digits of a victim’s Social Security number. Make sure you do not provide the rest of the number or your birth date.
Scammers alter the IRS toll-free number that shows up on caller ID to make it appear that the IRS is calling.
Scammers sometimes send bogus IRS e-mails to some victims to support their bogus calls.
Victims hear the background noise of other calls being conducted to mimic a call site.
After threatening victims with jail time or driver’s license revocation, scammers hang up. Soon, others call back pretending to be from the local police or DMV, and the caller ID supports their claim.

Don’t get hoodwinked by scammers. If you get a phone call from someone claiming to be from the IRS, DO NOT give the caller any information or money. Instead, you should immediately hang up. Call this office if you are concerned about the validity of the call. E-Mail Phishing – Phishing (pronounced ‘fishing’) is the attempt to acquire sensitive information such as usernames, passwords, and credit card details (and sometimes, indirectly, money) by masquerading as a trustworthy entity in an electronic communication. Communications purporting to be from popular social websites, auction sites, banks, online payment processors, or IT administrators are commonly used to lure the unsuspecting public. Phishing e-mails may contain links to websites that are infected with malware. Phishing is typically carried out by e-mail spoofing or instant messaging, and it often directs users to enter details into a fake website that looks and feels almost identical to a legitimate one. Always remember, the first contact you will receive from the IRS will be by U.S. mail. If you receive an e-mail or a phone call claiming to be from the IRS, consider it a scam. Do not respond or click through to any embedded links included in the e-mail and don’t open any e-mail attachments. Instead, help the government combat these scams by forwarding the e-mail to phishing@irs.gov. Unscrupulous people are out there dreaming up schemes to get your money. They become very active during tax season. They create bogus e-mails disguised as authentic e-mails from the IRS, your bank, or your credit card company, none of which ever request information that way. They are trying to trick you into divulging personal and financial information such as bank account numbers, passwords, credit card numbers, Social Security numbers, etc., they can use to invade your bank accounts, make charges against your credit card or pretend to be you to file phony tax returns or apply for loans or credit cards. Don’t be a victim. Imagine your return being e-filed and it gets rejected as already filed. You attempt to get a copy of the return but can’t because you don’t have the ID of the other unfortunate taxpayer who was used as the other spouse on the return. All the while, the scammers are enjoying their ill-gotten gains with impunity.
STOP-THINK-DELETE
You need to be very careful when responding to e-mails asking you to update such things as your account information, pin number, password, etc. First and foremost, you should be aware that no legitimate company would make such a request by e-mail. If you get such e-mails, they should be deleted and ignored, just like spam e-mails. We have seen bogus e-mails that looked like they were from the IRS, well-known banks, credit card companies and other pseudo-legitimate enterprises. The intent is to con you into clicking through to a website that also appears legitimate where they have you enter your secure information. Here are some examples:

E-mails that appeared to be from the IRS indicating you have a refund coming and that the IRS needs information to process the refund. The IRS never initiates communication via e-mail! Right away, you know it is bogus. If you are concerned, please feel free to call this office.
E-mails from a bank indicating it is holding a wire transfer and needs your bank routing information and account number. Don’t respond; if in doubt, call your bank.
E-mails saying you have a foreign inheritance and require your bank information to wire the funds. The funds that will get wired are yours going the other way. Remember, if it is too good to be true, it generally is not true.

We could go on and on with examples. The key here is for you to be highly suspicious of any e-mail requesting personal or financial information. What’s in Your Purse or Wallet? – What you carry in your wallet or purse can make a big difference if it is stolen. Besides the credit cards and whatever cash or valuables you might be carrying, you also need to be concerned about your identity being stolen, which is a far more serious problem. Thieves can use your identity to set up phony bank accounts, take out loans, file bogus tax returns and otherwise invade your finances, and all an identity thief needs to be able to do these things is your name, Social Security number, and birth date. Think about it, your driver’s license has two of the three keys to your identity. And if you also carry your Social Security card or Medicare card, bingo! An identity thief then has all the information he needs. You can always cancel stolen credit cards or close compromised bank and charge accounts, but when someone steals your identity and opens accounts you don’t know about, you can’t take any mitigating action. So, if you carry your Social Security card along with your driver’s license, you may wish to rethink that habit for identity-safety purposes. What You Should Never Do – Never provide financial information over the phone, via the internet or by e-mail unless you are absolutely sure with whom you are dealing. That includes:

Social Security Number – Always resist giving your Social Security number to anyone. The more firms or individuals who have it, the greater the chance it can be stolen.
Birth Date – Your birth date is frequently used as a cross-check with your Social Security number. A combination of birth date and Social Security number can open many doors for ID thieves. Is your birth date posted on social media? Maybe it should not be! That goes for your children, as well.
Bank Account and Bank Routing Numbers – These along with your name and address will allow thieves to tap your bank accounts. To counter this threat, many banks now provide automated e-mails alerting you to account withdrawals and deposits.
Credit/Debit Card Numbers – Be especially cautious with these numbers, since they provide thieves with easy access to your accounts.

There are individuals whose sole intent is to steal your identity and sell it to others. Limit your exposure by minimizing the number of charge and credit card accounts you have. The more accounts that have your information, the greater the chances of it being stolen. Don’t think all the big firms are safe; there have been several high-profile database breaches in the last year. Fake Charities – Another fraud and ID theft scam associated with tax preparation involves charity scams. The fraudsters pop up whenever there are natural disasters, such as earthquakes or floods, trying to coax individuals into making a donation that will go into the scammer’s pockets and not to help the victims of the disaster. These same crooks might also steal your identity for other schemes. They use the phone, mail, e-mail, websites and social networking sites to perpetrate their crimes. When disaster strikes, you can be sure that scam artists will be close behind. It is a natural instinct to want to provide assistance right away, but potential donors should exercise caution and make sure their hard-earned dollars go for the purpose intended, not to line the pockets of scam artists. You need to be alert for this type of fraud. The following are some tips to avoid fraudulent fundraisers:

Donate to known and trusted charities. Be on the alert for charities that seem to have sprung up overnight in connection with current events.
Ask if a caller is a paid fundraiser, who he/she works for and what percentage of the donation goes to the charity and to the fundraiser. If a clear answer is not provided, consider donating to a different organization.
Don’t give out personal or financial information—including a credit card or bank account number—unless the charity is known and reputable.
Never send cash. The organization may never receive the donation, and there won’t be a record for tax purposes.
Never wire money to a charity. It’s like sending cash.
If a donation request comes from a group claiming to help a local community agency (such as local police or firefighters), ask the people at the local agency if they have heard of the group and are getting financial support.
Check out the charity with the Better Business Bureau (BBB), Wise Giving Alliance, Charity Navigator, Charity Watch, or IRS.gov.

Protecting Against Identity Theft – To give you an idea of just how big a problem identity theft has become for the IRS, it currently has more than 3,000 employees working on identity theft cases and has trained more than 35,000 employees who work with taxpayers to recognize identity theft and provide assistance when it occurs. When ID theft happens, it becomes a huge problem for the taxpayer and the taxpayer’s tax preparer. So, the best way to combat ID theft is to protect against it in the first place and avoid becoming one of those unfortunate individuals who have to deal with it. Here are some tips to prevent you from becoming a victim:

Never carry a Social Security card or any documents that include your Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN).
Don’t give anyone your own or a family member’s SSN or ITIN just because they ask. Give it only when required.
Protect financial information. Check brokerage, IRA, 401(k), etc., accounts regularly to ensure your e-mail and street addresses haven’t been changed without your permission.
Avoid using public wi-fi, especially when accessing financial accounts.
Create strong passwords and keep them confidential.
Check your credit report every 12 months.

Secure personal information at home.

Protect personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for internet accounts.
Portable computers, tablets and smartphones can be stolen or lost. Limit the amount of personal information they contain that can be used for ID theft. Be extra vigilant against theft.
Don’t give personal information over the phone, through the mail or on the internet without validating the source.

If you do find you have been a victim of identity theft, contact this office immediately so we can notify the IRS and have a special ID PIN issued that you can use to file your tax return and prevent a thief from filing a fraudulent return under your ID. Also, call if you have any questions.

Article Highlights:

American Rescue Plan Expanded
One-Year-Only Change
Refundability
Child Care Expenses
Credit Percentage
Maximum Credit
Credit Phaseout
Employer-Provided Dependent Care Assistance

Great news if you are paying childcare expenses that enable you to work. As part of President Biden’s American Rescue Plan Act (ARPA) signed into law on March 11, 2021, the child and dependent care tax credit has been substantially increased. Here are the details: The credit increases and other provisions of the ARPA that apply to this credit only apply to 2021. The increase in the credit is part of the government’s effort to ease families’ financial burdens during the pandemic. A tax credit can be either nonrefundable or refundable. Nonrefundable credits can only offset a taxpayer’s tax liability, at most bringing it down to zero, while a refundable credit offsets the tax liability and any credit amount in excess of the liability is refunded to the taxpayer. Generally, the childcare credit is nonrefundable. However, for 2021, it is fully refundable if the taxpayer’s primary residence (or at least one spouse on a joint return) is in the U.S. for more than half the year. The credit is based upon a percentage of the taxpayer’s care expenses for a child under the age of 13 (the expenses count up to the date the child actually turns 13) that allow a taxpayer to work. In the case of a married couple, the credit only applies if they are both employed. There are special provisions for a spouse who is disabled or a student that are not covered in this article. There is a maximum to the expenses that can be used to figure the credit for 2021:

$8,000 for one child, up from the normal $3,000 in any other year.
$16,000 for two or more children, up from the normal $6,000 in any other year.

In addition, the percentage used to calculate the credit for most taxpayers has been increased to 50%. In any other year, that percentage would vary depending upon the taxpayer’s adjusted gross income (AGI), with lower-income taxpayers benefiting from the highest percentage rate (35%) and the lowest percentage rate (20%) for higher-income taxpayers. A combination of the higher maximum expenses and the 50% rate results in a significant increase in the maximum credit:

$4,000 for one child (50% of expenses up to $8,000)
$8,000 for the care of 2 or more children (50% of expenses up to $16,000)

This increase in the credit is targeted at lower-income taxpayers, so it includes a phaseout provision for higher-income taxpayers. The 50% credit rate begins to phase out when the taxpayer’s AGI reaches $125,000 (1 percentage point for each $2,000 above the $125,000 threshold), but the rate isn’t reduced below 20% until the AGI reaches $400,000, at which point the credit phaseout picks up again. In addition, since the purpose of the credit is to help lower-income workers’ childcare expenses, the expenses used to calculate the credit are limited to the taxpayer’s income from working. In the case of a married couple, the expenses are limited to the working income of the lowest-earning spouse. This all may seem a bit complicated, so here is a typical example:
Example: A married couple has 2 children under the age of age 13 and both work. One spouse makes $25,000 and the other makes $18,000. They have no other income, so their AGI is $43,000 ($25,000 + $18,000)—under the AGI phaseout threshold of $125,000. During the year, they incurred $14,000 in childcare expenses for their 2 children. The maximum expenses allowed are $18,000, but in this example, we are limited to the $18,000 of expenses or the working income of the lowest-earning spouse, which is $14,000. Thus, we must use $14,000 as the expense amount. Child care for this couple costs $7,000 ($14,000 x 50%).
For those who enjoy employer-provided dependent care assistance, the ARPA also changes (for 2021 only) the exclusion for employer-provided assistance for dependent care, increasing the maximum amount of excludable earnings from $5,000 to $10,500 for a married couple filing jointly ($5,250 for married filing separate). If you have questions about how this one-year change might affect your tax situation, please give this office a call.