New Year, New Taxes: 2021 Tax Law Changes and Trends That Impact Your Tax Return

The tax year 2021 filing season is here and in the wake of the pandemic, there are different forms of tax relief and provisions that were either extended, expanded, or are new this season. Americans are also faced with a multitude of life changes that all have an impact on their 2021 taxes. For example, millions of Americans became self-employed for the first time, market volatility accelerated the wave of new investors, and in the virtual environment more people lived in multiple states. But what do these tax and life changes mean to your taxes, and what should you look out for this tax season?

Although TurboTax easily guides you through tax changes and deductions and credits specific to you and your unique situation, here is what you need to know this tax season.

What New Letters or Forms Should I Look Out For When I Do My Taxes?

Letter 6419, 2021 Advance CTC

Under the American Rescue Plan, the IRS made several changes to the Child Tax Credit, which includes increasing the amount of the credit and also sending advance payments of the 2021 Child Tax Credit beginning in July. If you received advance payments, be on the lookout for a new IRS letter 6419 since you will have to report the correct amount of advance payments you received from the IRS when you file your taxes. The IRS began sending letter 6419 in December to help you accurately enter the amount of advance Child Tax Credit you received. Make sure you have this letter in front of you when you sit down to file your taxes, so you can get the full amount of Child Tax Credit you’re eligible for.

Letter 6475, Your Third Economic Impact Payment

In late January, the IRS will begin issuing Letter 6475 to recipients of the third round of stimulus payments. Letter 6475 will include information regarding the third stimulus or EIP payment issued by the IRS. Most eligible people already received the third stimulus payment, but make sure you have letter 6475 in front of you when you file your taxes, so you can enter the correct amount of third stimulus payment issued to you and claim more stimulus in the form of a Recovery Rebate Credit, if you are eligible for more. Some situations where you may be eligible for a Recovery Rebate Credit are if your actual 2021 income is less than the income used to determine your third stimulus payment, if you had a baby in 2021, or if you didn’t receive the third stimulus payment at all and you are eligible.

You should take care to NOT include any information regarding the first and second stimulus payments received in 2020, or the 2020 Recovery Rebate Credit, when completing your 2021 return. This Letter 6475 will help you accurately record the total amount of the third payment received to calculate the 2021 Recovery Rebate Credit.

What COVID Relief Provisions Were Extended for Tax Year 2021?

Charitable Contributions 

If you are one of the 90% of taxpayers who claims the standard deduction ($12,550 single, $25,100 married filing jointly, $18,800 head of household) then you can still deduct up to $300 in cash contributions you made to a 501(c)(3) charitable organization and new, for tax year 2021 you can deduct up to $600 in cash contributions if you file married filing jointly. Usually only people who can itemize their deductions can claim charitable contributions, but this tax relief was extended for tax year 2021.

Special Lookback for Earned Income Tax Credit

Another tax provision extended into tax year 2021 is the ability to use your 2019 income, instead of your 2021 income if it will help you claim Earned Income Tax Credit or more Earned Income Tax Credit. This is huge since the Earned Income Tax Credit can be up to $6,728 for a family with three kids.

Qualified Sick and Family Leave Credits

If you were self-employed in 2021 and you were sick or taking care of a family member as a result of COVID, you may be able to claim the Qualified Sick and Family Leave Credits in tax year 2021. The American Rescue Plan extends refundable tax credits for sick leave and family leave through tax year 2021 for both eligible self-employed and small business owners. The provision also allows you to use prior year net earnings from self-employment in the calculation of the average daily self-employment income if the prior year’s net earnings help you arrive at a higher average daily self-employment income. 

What are Some of the New Tax Laws for Tax Year 2021?

2021 Child Tax Credit

One of the biggest and most talked about new tax provisions for tax year 2021 is the expanded 2021 Child Tax Credit. Under the American Rescue Plan, the Child Tax Credit was expanded and increased. The Child Tax Credit increased from $2,000 to up to $3,600 for each dependent child under 6 and up to $3,000 for each dependent child from 6 to 17. The credit is also now fully refundable if you live in the U.S. as your main home for more than a year. This is also the first time you may be able to claim the Child Tax Credit for your dependent aged 17.  

Under the new Child Tax Credit provision, you may have received an advance payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above starting in July. Keep in mind that you may see less Child Tax Credit when you file your 2021 taxes and in turn a lower tax refund if you received advance payments that were a portion of your full 2021 Child Tax Credit. Make sure you have IRS Letter 6419 in front of you when you sit down to file, so you can enter the correct advance payment amount received and claim the 2021 Child Tax Credit you are eligible for.

Expanded Child and Dependent Care Credit

The American Rescue Plan also made some major changes to the Child and Dependent Care Credit for tax year 2021 only. If you sent your kids under 13 (no age if disabled) to daycare, summer camp, or even sport camps so you can work, you may be able to claim an increased Child and Dependent Care Credit of up to $8,000 for two or more kids and up to $4,000 for one child! Under the new provision, the credit is also fully refundable, meaning you can still get the credit even if you don’t owe any taxes.

Expanded Earned Income Tax Credit

Under the American Rescue Plan, the Earned Income Tax Credit was expanded for workers without kids and nearly tripled the maximum credit. Eligibility is also extended for a wider range of filers, now allowing taxpayers to qualify who are over 65 or between the ages of 19-25.

Third Stimulus Payment

Under the American Rescue Plan a third stimulus payment was issued ($1,400 single, $2,800 mfj, and $1,400 per dependent including adult dependents). You may be wondering if the third stimulus payment is taxable, but you should know that like other stimulus payments the third stimulus will not be taxable. It will be reconciled on your 2021 taxes, meaning you will include the amount you received for the third stimulus on your 2021 taxes when you file.

If you received too little you can claim more in the form of a Recovery Rebate Credit. If you receive too much you don’t have to pay it back. Had a baby in 2021 or are you able to claim another dependent? You may be able to claim more stimulus in the form of a Recovery Rebate Credit. Make sure you have IRS letter 6475 that reports how much stimulus payment you received, so you can enter the correct amount and claim any additional stimulus in the form of a Recovery Rebate Credit you’re eligible for when you file your taxes..

How Do Trends or Life Changes Have an Impact on My Taxes?

Self-Employment

There are trends emerging following COVID that could impact your taxes. If you were one of the millions that became self-employed in 2021, whether it was due to the Great Resignation or you joined the Creator Economy, remember you will receive a Form 1099-NEC reporting your income of $600 or more, but even if you don’t receive a Form 1099-NEC you should remember to report your income. Also, don’t forget expenses directly related to self-employment like your start-up cost, computer equipment, website fees, and home office expenses, which can reduce your taxable income.

Digital Nomads

With the ability to work from home or anywhere, millions of people took that literally and have taken off on adventure in vans, exploring the great outdoors with nothing but wifi and the open road. If you were able to keep your 9 to 5 while traveling the open road, there are some tax implications if you’ve been living in different states, even temporarily. Most states will require you to pay taxes in other states besides your home state where you made money after 183 days (or just over 6 months). But there are some states with reciprocal agreements so someone isn’t on the hook to pay taxes in two states. 

Investing

If you were one of the millions who took advantage of the volatile market and started investing, remember you only have to pay taxes when you sell your stock or cryptocurrency. Also, you can offset your gains with the losses you have. You can also offset your ordinary income like wages with up to $3,000 in losses. Check out our Cryptocurrency Interactive Calculator to get an estimate of your capital gains or losses on your cryptocurrency transactions.

Don’t worry about knowing all of these tax rules. No matter what your situation or how you want to file, TurboTax has you covered. With TurboTax you can do your taxes yourself, get help from an expert along the way or hand them off from start to finish to a dedicated tax expert.