THE CHILD AND DEPENDENT CARE CREDIT FOR 2021

The American Rescue Plan made changes to the Child and Dependent Care Credit for 2021. 

You may be able to claim this credit if you paid expenses for the care of a dependent child under the age of 13, or a dependent of any age or spouse who is incapable of self-care and who lives with the taxpayer for more than half of the year, to enable you (and your spouse, if filing a joint return) to work or actively look for work.  

Qualifying expenses include the cost of after-school care and summer day camp.  Day camp expenses qualify even if even if the camp specializes in a particular activity, such as computers or soccer.  Only day camp expenses qualify for the credit; the cost of an overnight camp does not qualify.

You can claim the credit on expenses incurred up to the child’s 13th birthday. If your son turns 13 on November 18th you can still claim the credit on day camp expenses incurred during the summer or after-school care costs through November 17^th.

For 2021, eligible taxpayers can claim the credit on qualifying out of pocket employment-related expenses up to $8,000 for one dependent (up from $3,000 in prior years) or $16,000 for two or more dependents (previously $6,000).  Expenses paid by employer-provided benefits, such as those provided through a Dependent Care Flexible Spending Account (FSA), are not eligible for the credi 

The maximum credit for 2021 is 50% (previously 20%) of the qualifying expenses - $4,000 for one qualifying individual or $8,000 for two or more qualifying individuals.  The percentage is reduced once Adjusted Gross Income exceeds $125,000, regardless of filing status.  No credit is allowed for a taxpayer with AGI over $438,000, again regardless of filing status. 

The credit is fully refundable for 2021.

The maximum amount an employee can contribute to an employer-sponsored Dependent Care FSA is increased to $10,500 (up from $5,000), but only if the employer plan is revised to allow this increase.  Contributions to such a plan are considered “pre-tax” for federal income tax purposes.  If you contribute $10,500 to a revised employer plan your federal taxable wages, reported in Box 1 of the Form W-2, will be reduced by $10,500.   

Be sure to get the federal Employer Identification Number of the care provider if it is a “for-profit” business.  You must report this number on the Form 2441 - the IRS will disallow the credit if you do not provide an ID number. However, according to the IRS, “You do not have to show the taxpayer identification number if the care provider is one of certain tax-exempt organizations (such as a church or school). In this case, enter ‘Tax-Exempt’ in the space where the tax form calls for the number.”

TTFN

JUST SO YOU KNOW

I very seriously and sincerely believe no intelligent person could ever support, defend or vote for Trump.  Not in 2016.  Not in 2020.  And not now.

I very seriously and sincerely believe the only reasons anyone could support Trump is because (1) he/she is a complete moron, (2) Trump affirms and “legitimizes” his/her racist and bigoted beliefs, or (3) he/she has no conscience.

I very seriously and sincerely believe anyone who continues to support Trump is truly a clear and present danger to America, American values and American democracy.

WHAT THE IRS SHOULD DO

In reaction/response to the COVID-19 pandemic the Internal Revenue totally closed down all operations and offices for many months in 2020.  During this period, the IRS did not process tax returns – current and amended – and did not process taxpayer and tax professional correspondence.  I do not know the extent to which payments made during this period were acknowledged and processed.
 
The “correctness” of the extent and duration of the IRS closure is open to interpretation.  But it happened and we must now deal with the consequences. 
 
When the IRS finally opened up again its system continued to spew out automatic intimidating balance due notices based on the information in the system prior to the closure.  However, much of the backlog of unopened and unprocessed correspondence were responses by taxpayers and tax professionals to erroneous balance due assessments, explaining the IRS error or correcting a taxpayer error.
 
Taxpayers in general are truly intimidated by continual, however erroneous, IRS notices.  And they will pay the requested balance due although they know the amount requested being wrong.  Many taxpayers paid the IRS what it asked for, despite having previously written, or had their tax professional write, to the IRS to explain errors in the assessment.
 
The IRS has acknowledged the backlog of returns and correspondence.  But it continues to automatically issue balance due notices, regardless of the fact that it is aware that the taxpayer may have previously responded to the notice providing information and documentation.  These continued notices assume the taxpayer had totally ignored all previous notices, which is often not true.
 
Responses to the continued erroneous mailings create more correspondence and increase the already humongous backlog.  And taxpayer erroneous overpayment of incorrect assessments must be addressed by taxpayers and tax pros, creating more correspondence to add to the pile.  This only compounds the problem.
 
What the IRS should have done, and should do now, is put a temporary hold on all open balance due accounts and cease from sending out automatic notices and other collection activities for these accounts until the backlog of correspondence is processed.  As correspondence regarding a taxpayer notice is acknowledged in the IRS system the hold must be continued until the issue is resolved.
 
Tax professional membership organizations should join together to urge the IRS to do this now.
 
TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

* Attention NJ taxpayers – you may soon be getting a check in the mail from your Uncle Phil for up to $500 (highlight is mine) -   
 
“Beginning July 2, 2021, the Middle Class Tax Rebate will be issued to eligible New Jersey residents that file a 2020 resident Income Tax return (NJ-1040) with a tax balance of $1 or more. There is no need to apply for this rebate. A rebate will be calculated automatically for eligible taxpayers when you file your NJ-1040.”
 
For more information go here.
 
* Kay Bell provides a “Guide to IRS online ways to get, track or change Advance Child Tax Credit payments” at DON’T MESS WITH TAXES.
 
She prefaces the post with a warning –
 
“Don't fall for scammers who falsely say they can help you get, or get more, of the enhanced Child Tax Credit amounts that started going out this week. Instead, get help from a tax pro or use the Internal Revenue Service's online tools.”
 

* The recent report by the National Taxpayer Advocate reported that at the end of the 2021 tax filing season the IRS faced a backlog of over 35 million individual and business income tax returns that require manual processing.  This includes about 16.8 million manual (paper) returns waiting to be processed and about 2.7 million amended returns awaiting processing.  And that does not count the backlog of correspondence.

 

Russ Fox emphasizes what you need when waiting for a federal refund or a response to correspondence in “At Least I’m Not Classified as “Dead” at TAXABLE TALK -

 

“The overall theme when dealing with the IRS remains the same: patience.  You need it when dealing with the IRS.  I do expect things to slowly improve once the IRS moves employees back to the Service Centers (probably this Fall), but given the humongous backlog it will takes years for the IRS to be back to normal.”

 

There is hope for those waiting for refunds.  I have heard from 3 clients recently who have finally received their 2020 refunds.

 

BTW – a few years ago I also had a client who received a letter from the IRS telling him the Service was not issuing his requested refund because he was dead.  Thankfully it did not take 7 years to fix.

 

TTFN

{Once again I DID NOT enter the first few paragraphs in all caps. The Blogger system is apparently totally FU-ed and automatically does this - I have no idea why.}

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

* Kay Bell tells us “Most U.S.taxpayers believe tax cheating is wrong” at DON’T MESS WITH TAXES –

 

“87 percent said it is not at all acceptable to cheat on their income taxes.

 

Even more, 94 percent, believe it is a civic duty to pay their fair share of taxes.

 

Another 91 percent said everyone who cheats on their taxes should be held accountable.”

 

* And Kay outlines “3 Advance Child Tax Credit moves (& more!) to make in July”.

 

* Following up on an earlier post titled "The Tax Field Is Broken" Jason Dinesen provides his thoughts “On Clients Hating TheirTax Pro”.

 

Jason makes an excellent point about the task of today’s sincere and ethical tax pro -

 

“Taxes are hard — I used to be fascinated by the complexity of taxes; now the complexity simply scares me. I spend so much time trying to get things right on tax returns and deal with the constant changes and the complexity and the risk . . .”

 

* The WASHINGTON POST reports “IRS faces 35 million unprocessed tax returns as backlog swells, watchdog says” -

 

“The Internal Revenue Service closed the most recent filing season with more than 35 million in unprocessed tax returns, as the agency’s backlog grew markedly amid a crush of challenges related to the pandemic and economic relief efforts, a government watchdog said Wednesday.

 

Erin Collins, the National Taxpayer Advocate, said in her report that about 17 million paper tax returns are still waiting to be processed and approximately 16 million additional returns have been placed on hold because they require further review manually. Another 2.7 million amended tax returns have not been processed.”

 

* A reminder – don’t call or email your tax preparer to ask where your refund is.

 

THE LAST WORD –

 

If you are not part of the solution you are part of the problem.

 

Every single Republican who does not vocally oppose, denounce and disavow Trump and his lies is equally as responsible as Trump and the current Republican leadership for the damage being done to America, Americans, American values and American democracy.

 

TTFN

 

{editorial note - I have no idea why the blogger system printed the first item in all caps and all italics and the second item in all caps.  This is not how I entered the text.  Blogger is FU-ed - or it really likes Kay Bell.}

 

 

 

HAPPY FOURTH OF JULY!

America truly has a reason to celebrate this July 4th.  

Thankfully we now have a President with intelligence, integrity and humanity - something that was truly lacking on the past four July 4ths.

THE 2021 CHILD TAX CREDIT

For tax year 2021, families claiming the Child Tax Credit will receive up to $3,000 for each qualifying child who is between the ages of 6 and 17 at the end of 2021. They will receive $3,600 per qualifying child under the age 6 at the end of 2021.     

The increase – the additional $1,000 or $1,600 - is reduced (phased out), for incomes over $150,000 for married taxpayers filing a joint return, $112,500 for heads of household, and $75,000 for all other taxpayers.  The remaining $2,000 is phased out based on the pre-2021 rules.  For 2021 the credit is fully refundable. 

Advance payments of up to 50% of the 2021 Child Tax Credit will begin to be made regularly from July through December to eligible taxpayers who have a main home in the United States for more than half the year.  You can elect not to receive these advance payments.   

Like the advance premium tax credit, any advance payment of the Child Tax Credit will be reconciled on the 2021 Form 1040.  Please be aware that if you do receive advance Child Tax Credit payments in 2021 this will reduce the potential federal refund on your 2020 Form 1040.

The IRS website has established the following tools to assist families in dealing with the changes to the credit. 

Child Tax Credit Eligibility Assistant: allows families to answer a series of questions to quickly determine whether they qualify for the advance credit

Child Tax Credit Update Portal: allows families to verify their eligibility for the payments and, if they choose to, unenroll or opt out from receiving the monthly payments

Child Tax Credit Non-filer Sign-up Tool: allows eligible individuals who don’t normally file an income tax return to register for payments

It is my understanding that the IRS will provide those who receive advance payments with a statement in January.  Be sure to save this statement and give it to your tax preparer.       

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 A day late, but hopefully not a dollar short.

* “I Haven’t Received My IRS Refund. Can You HelpMe?”  I have received several emails with this message.  So has Russ Fox of TAXABLE TALK and many other fellow tax pros.

 

Russ joins me in pointing out (the highlights are mine) –

 

“Neither I nor any other tax professional can speed up your IRS refund.”

 

And –

 

“Your tax professional cannot fix this.  There is no one to call to have this resolved.  Indeed, the IRS asks that you do not call them as there really is nothing that can be done.  Please don’t call your tax professional either; he or she cannot make your refund come to you any faster this year.  You must just be patient.”

 

* Speaking of Russ, he provides a review of “The 2021 Tax Season (Part 1)”.  Part 1 refers to the period ending May 15^th – Part 2 ends October 15^th.

 

* BTW - have you seen my annual review of THAT WAS THE TAX SEASON THAT WAS yet? 

 

Why not?

 

* A blast from the not-so-distant past that is still valid from Paul Murray at THE GOOD MONEY LIFE (new to me) - “4 Reasons We Picked 529 College Savings Plans for Our Children”.

 

* Kay Bell explains “Taxpayers now can go online to optout of Advance Child Tax Credit payments, verify eligibility” at DON’T MESS WITH TAXES.

 

THE LAST WORD –

 

Take the NO GOP PLEDGE.  The future of American democracy depends on it.

 

TTFN

READ MY LIPS . . . . .

 

There is absolutely NOTHING I, or any tax professional, can do to expedite the processing of your 2020 federal or state income tax return or to find out why your anticipated federal or state refund has not been issued yet.
 
There is NOTHING I, or any tax professional, can do to find out the status of your 2020 federal or state tax return that you cannot do yourself – by going to http://www.irs.gov/refunds or the corresponding tool on your state tax agency’s website.
 
The IRS is backed up due to its offices being closed for too many months in 2020.  You need to be patient.
 
DO NOT call or email me, or your tax professional, to ask about your 2020 refund. 
 
Got it?
 
TTFN

DOCUMENTING YOUR INCOME AND DEDUCTIONS

 

I expect by now you have prepared and submitted your 2020 federal and state tax returns and are waiting, patiently, for your refunds. 

Did you find it difficult to compile all the necessary 2020 information and documentation to give to your tax preparer?  The more organized you are at tax time the more likely you will be able to take full advantage of all deductions, credits and tax-saving strategies available. And the more organized you are the lower your tax preparation fee.

I have created the 2021 GUIDE TO TAX RETURN RECORDKEEPING to help you in gathering and organizing your 2021 tax “stuff” and help you to pay the absolute least federal income tax possible for 2021.

My guide contains detailed text covering what is taxable and deductible and what information and documentation you will need to properly prepare your 2021 tax return, and forms, schedules and worksheets for compiling and identifying the documentation you will need to provide to your professional tax preparer in 2022.  It discusses in detail –

·         MY BEST TAX ADVICE

·         WHAT TO GIVE YOUR PREPARER

·         WHO MUST FILE A 2021 TAX RETURN

·         FILING STATUS

·         DEPENDENTS AND EXEMPTIONS

·         INFORMATION RETURNS

·         INVESTMENT SALES

·         2021 CONTRIBUTION LIMITS FOR RETIREMENT PLANS

·         REPORTING GAMBLING INCOME

·         ADJUSTMENTS TO INCOME

·         ITEMIZED DEDUCTIONS 

·         DEDUCTIBLE RENTAL EXPENSES

·         CHILD CARE EXPENSES

·         ESTIMATED TAXES

·         HOW LONG MUST I KEEP MY TAX RECORDS

·         YEAR-END TAX PLANNING

The cost of the Guide is only $10.95 sent as an email attachment – the text in pdf format and the forms, schedules and worksheets in Word format.  A print version sent via postal mail is also available for $15.45.

Send your check or money order for $10.95 or $15.45, payable to Taxes and Accounting, Inc, to -

TAXES AND ACCOUNTING, INC

2021 GUIDE TO TAX RETURN RECORDKEEPING    

POST OFFICE BOX A

HAWLEY PA 18428

TTFN 

JOINT VS SEPARATE – THAT IS THE QUESTION

This past tax filing season I found that filing separate returns often put more money in the pockets of my married clients than in past years.

While usually in most cases filing separately would provide the same or more federal income tax, or only slightly less federal income tax, than filing a joint Form 1040 (or 1040-SR), the new refundable Recovery Rebate Credit, resulting from reconciling the first two economic stimulus payments, calculated based on 2018 or 2019 income, to the actual amount to which a taxpayer or couple was actually entitled to based on 2020 AGI, created a greater net combined federal refund or less net combined federal tax due on separate returns. 

On a joint return a combined AGI of over $150,000 would reduce and eventually eliminate one or both of the stimulus payments – but if one spouse had an AGI of less than $75,000 on their separate return they could get the full $1,200 and $600, plus any additional amount for applicable dependents, less the amount, if anything, they actually received, as a refundable credit.

However, the biggest tax savings this year came from filing separate state tax returns – especially for residents of the Garden State.  Over the years I have found that filing separate NJ state income tax returns could result in substantial state tax savings.  This is because of the way the different tax tables for Single or Married Filing Separately taxpayers and Married filers or Heads of Households are constructed.

In two separate occasions this year filing separate NJ-1040s saved my clients between $1,600 and $1,800 in NJ state income tax!

How was this possible?  I am not going to tell you here.  I realize it is selfish, but if you want to find out how I saved my clients so much money you will have to purchase my book THE JOY OF AVOIDING NEW JERSEY TAXES (updated for 2020) – the only book in existence I know of that discusses in detail tax planning for and preparation of the NJ-1040.  In it I reveal how my clients were able to save so much.  Click here to learn about this book and how to order it.  

Please note the e-book version for Kindle has not yet been updated for 2020.  For now, to read about the $1,600 - $1,800 in savings you must get the pdf or print version.

Unfortunately, you cannot file an amended return to change your filing status from joint to separate after the initial due date for that return has passed - so you cannot change your already filed 2020 joint return to separate filings.  But if you submitted an extension for your 2020 return you can still file separate 2020 returns.

The bottom line of this post is this – when preparing your income tax return, or having it prepared, compare, or request that your tax preparer compare, filing a joint return to filing separate returns.  You, and your tax pro, might be surprised.

TTFN

THAT WAS THE TAX SEASON THAT WAS 2021

My 50^th tax filing season, which, as it always does, began for me on February 1st, ended on May 17th.  It actually ended on May 16th, as I never work the last day (click here to learn why).

For the second year in a row, and, as far as I know, only the second time in history, the initial tax filing, and paying, deadline was extended.

The big issues this season had to do with reconciling the first two Economic Impact Payments to determine if a client qualified for a refundable Recovery Rebate Credit and the impact of the retroactive income tax components of COVID relief legislation passed in early March.

It was truly the rare federal return that I could complete in one sitting.  I either had a question about the return – most having to do with the Economic Impact Payment – or I had to wait for IRS guidance on tax issues related to the COVID relief legislation.  Despite my specifically asking clients to tell me what, if anything, they received in EIPs in my January letter the majority ignored this request. 

And often clients did not send me the same information for 2020 that I had requested when preparing their 2019 return.  My advice to my clients, and any taxpayer using a tax pro, is when gathering the information to prepare the current return  look at the previous year’s return and make sure all the information needed for the previous return is included in what you give me, or your tax pro, for the current return.  And please read carefully and completely my January client letter, or any similar correspondence from your tax pro, to see if there is any new information that is needed for the current return.

While the Recovery Rebate Credit was good for many clients – putting more money in their pockets – the fact that the IRS worksheet for the credit reconciled each of the two Economic Impact Payments separately, rather than combining both payments, was stupid (for the government) and financially imprudent (again for the government).  If a taxpayer got more than they were entitled to in the first payment but less than they were entitled to in the second payment, the first payment excess was not applied to the second payment shortage.  

For example, if a taxpayer got $200 too much in the spring of 2020 but $200 too little in January 2021 it was not a wash.  The $200 overpayment from 2020 was ignored and the taxpayer got the full $200 shortage for 2021 as a refundable credit on the 2020 Form 1040 (or 1040-SR).  While the reality is between the two payments the taxpayer got exactly what he/she/they was/were entitled to, the taxpayer actually ended up with $200 more than he/she/they was/were entitled to.

The logic of some of the stimulus payments was often confusing.  In many cases the first payment was calculated based on the taxpayer’s 2018 AGI and the second payment based on the taxpayer’s 2019 AGI, and I could reconcile how these payments were calculated, but not in all cases.  A surprisingly large number of clients who were entitled to the second payment based on 2018 or 2019 income did not get a check.  And in the case of a couple of married taxpayers who always file jointly, whose 2018 and 2019 AGI was clearly way above the income threshold, one spouse got a $600 check. 

I do believe the second payment, received in 2021, should not have been reconciled on the 2020 return.  Like the third $1,400 payment, while based on actual 2020 AGI, it should have been reconciled on the 2021 return prepared next year.

The IRS announced that the processing of 2020 returns claiming a Recovery Rebate Credit would take longer than “normal” returns and refunds on these returns would be delayed.  As of this writing I have not yet heard from any clients claiming this credit about IRS issues or inquiries – but it is still early.

The affect of the exclusion from income of the first $10,200 of 2020 unemployment benefits, part of the legislation signed into law by President Biden on March 11^th, on other tax deductions and credits is still confusing and unclear.  Specific guidance on whether the exclusion is added back in calculating household income for the Premium Tax Credit, for example, was never issued.  I held up completing returns where this applied as long as I could, but finally assumed it was not and calculated the allowable credit accordingly.  I was, however, truly pleased that taxpayers who received an excess advance premium credit during the year did not have to pay back this excess on their 2020 return.

Thankfully there were no auto, computer, equipment, or weather issues of consequence for me this season.  The only concern was the slowness of the Post Office in delivering work to and from me and payments to me.  The attempts by Trump and his lackey DeJoy to destroy the postal service to sabotage mail-in ballots last year has had continued lasting effects. 

Once again, I was actually happy to be “stuck” at home during the season, leaving my condo only to go to the Post Office, the bank, the supermarket, and restaurants.  And the deadline extension actually worked out good for me – I only had 6 GDEs for 4 clients (2 GDEs related to the children of these clients) this year due to late receipt of tax “stuff” and missing information. 

The excessive backlog of correspondence and 2019 and amended 1040s (and 1040-SRs) resulting from the IRS closing its doors for too many months in 2020 is causing delays in processing current returns.  I hope that the IRS will pay interest on 2020 refunds that take too long to be issued, as it did with 2019 late refunds.

On the state tax front, I continued to use, and appreciate, the new “New Jersey Online Income Tax Filing” system, which began last year, to electronically submit directly to the NJDOT free of charge almost all of the NJ-1040s for my clients.  Using this system, I can include attachments and request direct deposit of refunds.  If only the IRS had a similar system (those of you who know me are aware that in my 50 seasons I have never used flawed and expense tax preparation software to prepare federal returns – all my returns are prepared manually - so I cannot electronically submit federal returns). 

And I continued to use, and appreciate, the “enhanced” fill-in forms available at the New York State Department of Taxation and Finance website.  While I could not electronically submit returns directly to the Department, the returns must be printed and submitted via postal mail, this system does all the mathematical and tax calculations. 

A message for Fidelity Brokerage Services regarding an issue that has been ongoing for the past few seasons – don’t be so cheap!!!!!  

The Tax Reporting Statement that it sends to investors via postal mail does not include “Supplemental Information” such as the individual sources of dividends and distributions reported on Form 1099-DIV and other important information.  The information on the individual dividend sources is important to calculate income from US government obligations that are exempt on state returns and state taxable municipal interest.  You must go online to get this additional statement.  No other brokerage house that I know of does this – all of them include all information – required and supplemental - in the paper statement they mail to investors.  And clearly some brokerage houses do a better job of providing supplemental information than others.

Clients send me the incomplete statement they received in the mail from Fidelity.  When preparing their return, and knowing that dividends from mutual funds are included in the total ordinary dividend number, I have to email them and ask them to download the online statement and email or postal mail it to me.  This causes delays and a waste of my time. 

So that was the 2021 tax filing season.  Once I finish the GDEs I will be “officially” retired!  

Don't worry - I will continue to write THE WANDERING TAX PRO in retirement.

TTFN