Besides gathering documents, receipts and choosing a tax preparer, there are many things you need to be aware of before filing your income tax. Due to the ongoing pandemic and inflation, significant tax law changes and adjustments have been made for 2021.
Unemployment benefits and the Coronavirus stimulus package are newly introduced changes certified by the IRS (Internal Revenue Service).
We are listing a summary of some of the 2021 income tax changes so you can be prepared in advance.
2020-2021 Income Tax Law updates
Unemployment Benefits and Its Impact on Your Income Tax
If you are unemployed, your federal and state government might provide you unemployment compensation if eligible. The benefits include:
Wage/income depending on your previous earning.
The amount of time you have worked.
The minimum benefits are allowed by your state.
Unemployment compensation is a monetary value provided by the state government to help people who are currently unemployed.
The IRS considers unemployment compensation to be taxable income. Still, due to inflation faced in 2020, the American Rescue Plan passed on 11 March 2021 states that if your adjusted gross income (AGI) is less than $150,000, your first $10,200 of unemployment compensation paid in 2020 is tax-free.
Since many taxpayers had already filed their returns before the exemption, the IRS (Internal Revenue Service) is still issuing tax refunds in 2021. Although, this exemption is unlikely for the year 2022.
401K Early Withdrawals (Coronavirus Stimulus Package)
With a 401K Early Withdrawal, you can take out money from your retirement account before the retirement age (59 ½). Early withdrawals are generally not recommended as a penalty of 10% is charged on each withdrawal as certified by the IRS (Internal Revenue Service). An early withdrawal is also considered taxable by the IRS.
However, some exceptions protect you from the penalty charges, such as financial hardships and situations like child support, disability, among others.
Recently, the “Coronavirus Aid, Relief, and Economic Security Act,” or the “CARES Act,” passed by Congress on March 2020, also affects the 401K package by offering penalty-free withdrawals if you are affected by COVID-19.
Coronavirus Stimulus Package
Also known as the CARES Act, the coronavirus stimulus package labels 401K withdrawals or IRA transactions between 27 March 2020 and 31 December 2020 as “coronavirus-related” if you, your spouse, or your children are affected by the pandemic or are facing financial hardships due to the restrictions.
Benefits of CARES Act include;
Penalty-free 401K withdrawals.
It provides additional time to repay the 401K loan.
If your company permits hardship withdrawal or you repay some of the distribution, the loan or income will not be taxable.
You can distribute the tax on the withdrawal and loan for up to 3 years.
Aid in retirement plans, healthcare, and unemployment compensation.
The major components of the CARES Act have already expired, with a few being extended through 2021. For example, there is an exemption for employees to provide taxes on their student loan payments until 31 December 2021.
Increased Child Tax Credit Benefits
Child Tax Credit (CTC) makes you eligible to receive a certain amount to help raise your children. Before the American Rescue Act, the credit was $2,000 per child under 16 years of age. However, in 2021, every family was eligible for CTC. The tax credit amount has also increased significantly, from $2,000 to $3,000 per child and $3,600 per child under 6.
Moreover, it has also eliminated the income requirement and raised the qualifying age to 17 or younger. If you applied for CTC in 2020, you could also start receiving part of your new credit in 2021, from July to December, without waiting to file your 2021 income tax as certified by the IRS (Internal Revenue Service).
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