Will we have a “normal” tax season?
We are officially in the 4th quarter of the year! Needless to say, 2021 has been anything but normal in so many ways, and this year has brought more than its fair share of complexities to the tax landscape as well. There are dozens of tax law changes every year, and for many taxpayers, the changes have minimal impact on their business or personal tax results. However, the tax changes of the most recent years have brought sweeping changes that have impacted a lot more taxpayers than before. From IRS delays, to tax deadline changes, to IRS form changes, many taxpayers are just hoping for things to finally return to normal. Now 2022 will be here before we know it, and the big question that everyone is asking is:
Will things be normal for the 2022 tax season?
Unfortunately, we don’t have an answer for all things, but we do have some answers for taxes. With the ripple effects of COVID-19 still impacting the economy in the form of tax credits, remote work, and more, 2021 is shaping up to be another tricky tax year. So, normal may be a little far off. However, the IRS has laid out some very important tax changes in the American Rescue Plan Act (ARPA) that went into effect this year. The following examples of tax changes for the upcoming tax season comes from CPA Practice Advisor:
Economic Impact Payments: The third round of Economic Impact Payments (EIPs) began going out in March 2021. The maximum EIP of $1,400, plus payments for qualified dependents, isn’t subject to federal income tax. However, clients may have received less than they are entitled to and, therefore, are eligible for a credit on their 2021 return.
Child Tax Credit: ARPA enhanced the Child Tax Credit (CTC) by raising the maximum CTC to $3,000 ($3,600 for children under age six), making the credit fully refundable and authorizing advance payments of the credit. The IRS began issuing advance CTC payments in July 2021. This must be factored into 2021 tax returns and could cause tax return headaches. Clients should be informed that their tax refund may be smaller than they expected due to advance CTC payments.
Dependent care credits: Under ARPA, the maximum dependent care credit for 2021 is increased for taxpayers with an adjusted gross income of $125,000 or less to $4,000 for one child; $8,000 for two or more children (up from $600 and $1,200, respectively). In addition, the credit is made fully refundable. Ensure that your clients are reaping the maximum tax rewards on their 2021 returns.
Unemployment benefits: The new law also provides a unique tax break for some workers who lost their jobs in 2020. In brief, the first $10,200 of unemployment benefits is exempt from tax if your AGI was below $150,000. But many taxpayers have missed this tax break, so review your clients’ situation carefully.
COBRA subsidies: Generally, employees who leave a company may elect to continue health insurance coverage for a specified time (usually, up to 18 months) under the Consolidated Omnibus Budget Reconciliation Act (COBRA). But the employees must pay the tab (plus a standard 2% administrative fee). Fortunately, ARPA creates a 100% subsidy for COBRA premiums spanning April 1, 2021, through September 30, 2021. These payments are completely tax-free to those that benefit. Note: Employers may recoup their costs through a payroll tax credit.
Net result: This is shaping up as another challenging tax return season for taxpayers and tax return preparers alike. Plus, drums are beating louder in Washington for tax increases that might be enacted before the end of the year. So the short answer is… it doesn’t look like things are headed back to “normal” quite yet.
Fortunately, Team NextGen is here to help! Now more than ever you need a trusted ally who is in tune to all the tax law changes, and is proactively advising you of the best tax strategies for you and your business. Connect with us before the end of the year to get your year-end check-up and ensure you’re well prepared to file your tax return in the spring.