With the 2022 tax season approaching, now is a good time to check up on the tax breaks Congress passed to ease the financial pain of the coronavirus pandemic. Like the virus itself, these laws keep changing. Some that applied in 2020 were amended, extended, or ended last year. Here’s an update on where some Covid-19 relief laws stand to help file your 2021 return.
If you are a resident of one state but worked temporarily in another state, you may have to file a tax return and pay taxes in both states. Your home state will generally give you a credit for taxes paid to another state.
“Many states had a temporary fix for 2020 and part of 2021,” said San Francisco CPA, CFP Richard Pon. “They said if you were sheltering in place because of Covid-19, you didn’t have to report wages” earned in another state. These rules are complex and still changing, so if you worked outside your home state in 2021, check with a tax professional.
Normally, unemployment benefits are taxable on your federal return. In 2020 only, each person could get up to $10,200 in unemployment benefits federal-tax-free, but only if their adjusted gross income (single or married) was under $150,000. This tax break was not extended, so all unemployment received in 2021 is subject to federal tax.
Some states that normally tax unemployment also exempted up to $10,200 from state income taxes in 2020, but like the feds, they’re not exempting it in 2021.
Child Tax Credit
For 2020, parents got a tax credit worth up to $2,000 for each child 16 or younger at year’s end. The credit began to phase out once your adjusted gross income (AGI) climbed above $200,000 (single) or $400,000 (married filing jointly).
Congress beefed up this benefit for 2021. It raised the age limit to 17 from 16. It also increased the size of the credit—but only for low- and middle-income families—to $3,600 for each child younger than six and to $3,000 for children six through 17. The extra $1,600 or $1,000 starts phasing out for families with an AGI of more than $75,000 (single) or $150,000 (joint returns). The old $200,000/$400,000 income limits still apply to the basic $2,000 credit.
Normally, you claim this credit when you file your tax return. To pump the money out sooner, the IRS started sending half of the 2021 credit in monthly payments between July and December to families it thought would qualify based on their past tax returns. Parents can claim the other half on their 2021 returns, but if they received payments they were not entitled to, they will have to pay them back with their return, according to CPA, CFP Pon.
Congress made it easier for people who suffered a Covid-19-related hardship to take money out of an Individual Retirement Account, 401(k), or other workplace plan in 2020. This tax break expired in 2020, but if you took advantage of it, review these rules, because they could impact your 2021 return.
If you suffered a financial hardship, you could withdraw up to $100,000 from your retirement account in 2020 and instead of including the entire amount on your 2020 tax return, you could include one-third each in 2020, 2021, and 2022, thereby spreading the tax hit over three years instead of one. If you pay back more than the current year installment, you can recoup the tax paid by filing an amended return, says Mary Kay Foss, a CPA in Walnut Creek, Calif.
These tax breaks do not apply to withdrawals in 2021. But remember: If you took a coronavirus-related withdrawal in 2020 and haven’t returned it to your account, you must include at least a third of it on your 2021 return. And if you returned some of the money in 2021, you might need to amend your 2020 return to get a refund. A 2021 repayment will first offset the one-third reportable in 2021; any excess can reduce 2020 income by filing an amended return.
Normally, you cannot deduct charitable contributions unless you itemize deductions on your tax return. To encourage donations during the pandemic, Congress let people who take the standard deduction—instead of itemizing—deduct up to $300 in cash contributions per tax return, not per person, in 2020.
This law was amended last year. For tax year 2021, non-itemizers can deduct up to $300 in cash contributions per person, so a married couple can deduct up to $600.
Congress also changed where on your tax return you take this deduction. In 2020, you deducted it before calculating your adjusted gross income, so it reduced your AGI. In 2021, you will deduct it after calculating your adjusted gross income, so it won’t reduce AGI.
Moving it from above the AGI line to below the line won’t impact how much tax you pay, because that’s based on taxable income, a number further down the tax return. But AGI is important because it’s used to determine many tax credits, deductions, and government benefits, such as Medicare premiums and college financial aid. In general, a lower AGI is better. Moving the charitable deduction from above to below the AGI line could impact some people who are on the borderline between qualifying and not qualifying for various tax breaks or benefits.