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It's tax season again. Here's what you need to know before filing your 2021 returns

IRS Tax Form Photo

There have been several adjustments to the tax code that filers should know about before submitting their 2021 returns.

PITTSFIELD — Income tax season is here again, and there are several reporting changes that Berkshire taxpayers should be aware of before breaking out the calculators to file their 2021 returns.

The Eagle recently asked two local finance professionals, Berkshire Eagle business columnist Luke Delorme, who is a certified financial planner at American Investment Services in Great Barrington, and certified public accountant Christine Arace, of Killeen, Arace & Quinn, of Pittsfield, to help break down what these changes are.

Additional information was obtained from an analysis of the 2021 tax return changes by Kiplinger, a publisher of business forecasts based in Washington.

Here is what you need to know:

Q: What are the changes to the earned income tax credit?

A: The earned income tax credit, enacted in 1975, is the largest refundable tax credit for low- to moderate-income families in the United States, which makes it one of the federal government’s largest anti-poverty programs.

For this tax-filing year (2021) only, more childless workers are eligible to qualify for the credit, because the maximum credit is nearly tripled for these taxpayers and is being made available to younger workers and senior citizens for the first time. In the past, the credit for taxpayers without dependents was available only to those ages 25 to 64.

In 2021, the maximum earned income tax credit for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an adjusted gross income below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years old. Homeless youths and former foster youths may qualify if they are at least age 18.

Another change is available to childless workers and families with dependents. For 2021, it allows them to choose to figure the credit using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.

Q: What is the reconciliation process for those who received advance payments from the child tax credit?

A: Beginning in July 2021, the IRS, in advance, paid taxpayers who claimed children on their 2020 tax returns half of the child tax credit they normally would have received for 2021, on a monthly basis. The IRS automatically sent the advance child tax credit payments to taxpayers, unless they opted out.

That practice has been discontinued for 2022. For 2021, those who received the advances on the child tax credit are required to reconcile what they received with the total credit allowed.

“Normally, this would be claimed on your 2021 return, but they were basically prepaying taxpayers half of their credit,” Arace said.

Taxpayers who fall into this category will receive a letter from the IRS stating the amount the taxpayer received in advance, and that amount will have to be included on this year’s return.

“A lot of people will be getting smaller refunds than they received in the prior year because they expected the full child tax credit and they have already received half of it,” Arace said. “People forget about that.”

Q: When state taxpayers filed their 2020 returns last year, the IRS decided that it wasn’t going to tax the first $10,200 of unemployment. Will we be taxed on that this year?

A: “Unemployment is fully taxable in Massachusetts this year. They are not giving the exemption,” Arace said.

She believes that this change will affect some taxpayers, because people were waiting to see if the federal government was going to issue that exemption again this year.

“They have not issued that,” she said. “This benefited a lot of unemployed taxpayers last year.”

For more information on Massachusetts unemployment, go to tinyurl.com/2v4tms67.

Q: Will taxpayers be taxed on benefits they received from the Massachusetts Family and Medical Leave Act?

A: The state statute was approved by the Legislature in 2018, but it didn’t go into effect until Jan. 1, 2021, so, this is the first year that taxpayers are eligible to benefit from it.

The act established a system of paid leave for up to 12 weeks for employees to care for a seriously ill or injured family member, to care for a new child, or to meet needs connected to a family member's active military service. It also allows up to 20 weeks of job-protected leave to allow a worker to recover from a serious illness or injury, or to take care of a family member with serious health issues.

Right now, the benefits for taxpayers are uncertain because the federal government hasn’t decided if the benefit is taxable. Massachusetts has indicated that it will follow the federal government’s guidelines, but Arace said recently that she didn’t know when those guidelines would be released.

“So, at this point, it is uncertain whether this money is taxable or not,” Arace said.

Q: How has the child care and dependent care credit changed?

A: This credit has received a significant improvement from the American Rescue Plan Act, but at present, it’s only for the 2021 tax year.

In 2020, the credit covered child and dependent care expenses for either a dependent child younger than 13 when the care was provided, or a qualifying disabled dependent or spouse of any age who lived with a taxpayer, according to Kiplinger’s.

The nonrefundable credit was worth 20 to 35 percent of up to $3,000 in eligible expenses for one child/disabled person, or $6,000 for two or more. The percentage decreased as income exceeded $15,000.

This year, the credit is refundable fully, and the maximum credit percentage has increased from 35 to 50 percent. The credit is allowed for up to $8,000 in expenses for one child/disabled person, and $16,000 for more than one.

With the 50 percent maximum credit percentage applied, the top credit for 2021 is $4,000 for families with one child or disabled person, and $8,000 for more than one.

The credit also is allowed for families whose income is less than $125,000 per year, instead of $15,000 per year. Beyond that threshold, the credit begins to phase out. But, all families with incomes of $125,000 to $438,000 are eligible to receive at least a partial credit in 2021.

Q: What is the Recovery Rebate Credit?

A: This has to do with the third round of stimulus checks that some taxpayers received from the American Rescue Plan Act in March 2021.

Those checks totaled $1,400, with an additional $1,400 for every dependent in a family. But, not everyone received that much, and some filers received nothing at all. The payments were phased out for joint filers, head-of-household filers and single filers at certain levels of adjusted gross income.

Those who were eligible for the checks and either didn’t receive them or got less than they were supposed to can apply for the 2021 Recovery Rebate Credit.

More information on the Recovery Rebate Credit can be found on a questions-and-answers page at irs.gov.

Tony Dobrowolski can be reached at tdobrowolski@berkshireeagle.com or 413-496-6224.

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