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.