Tax Tips for Everyone is created to provide updates on current tax topics and increase understanding of terms and issues on income and other taxes.
Tax Credits for a Child Born in 2021
Most families qualify for a child tax credit of $3600 for a child born in 2021. Since the IRS did not know about the child, the parents would not have received any of the advance child tax credit payments and are eligible to claim the entire amount. There are income limits for eligibility. The additional $1600 (above the old $2000 credit) is reduced for couples with an adjusted gross income over $150,000. However, they could still receive the $2000 portion of the child tax credit up to a joint income of $400,000.
Also, most individuals received $1400 in stimulus funds during 2021. The IRS sent a letter #6475 stating how much stimulus was paid. Most families are eligible to claim an additional $1400 for a child born in 2021.
Families with children too old to qualify for the Child Tax credit may still get some help. Many taxpayers qualify for a $500 tax credit for each dependent other than a qualifying child. For example: A child age 18 or older, such as a college student or other dependent like a disabled child or elderly parent you care for typically is a qualifying person. The credit does phase out for couples making over $400,000 and others making over $200,000.
Filing Early Safer
The IRS recommends filing your tax return as early as possible. Early filing helps prevent scammers who might steal your identity and file a return with your name on it.
Child and Dependent Care Credit
Daycare or other payments to care for a child or other dependent family member may qualify the parent(s) for the child and dependent care credit. For 2021 the maximum eligible expense for the credit is $8,000 for one child and $16,000 for two or more. Depending on their income, taxpayers could write off up to 50% of these expenses. A qualifying child must be under age 13. Other dependents must meet specific requirements.
IRA Contribution
Remember you can contribute to your IRA up to the 2021 tax return filing deadline (April 18th) and still get the tax deduction for contributions to a traditional IRA. If in the 12% tax bracket, every $1000 contribution creates a $120 tax deduction. For 2021 the IRA contribution limits are $6000 for taxpayers under age 50 and $7000 for those older. Couples with a modified adjusted gross income under $105,000 receive the full deduction (Singles under $66,000). Higher incomes received a reduce deduction up to a higher limit. Couples with MAGI over $125,000 do not get a deduction. However, they are still putting money back for retirement which is always good. Roth IRA contributions are not tax deductible and have slightly higher contribution limits.
Math Errors Abound
The IRS sent out math correction notices on over 14.5 million returns due to math errors in 2021. Many of the errors were related to the recovery rebate credit being miscalculated. The IRS expects many errors due to the stimulus payments and child tax credit on 2021 returns. Double check your return! A significant error could result in not only owing the taxes due, but penalties as well.
2022 Issue – Income from Internet Sales or via Electronic Payments
2022 brought changes for taxpayers who receive payments through eBay, PayPal, Google Checkout and other Payment Settlement Entities (PSEs). Starting in 2022, PSEs will now provide a 1099-K to anyone with income over $600 throughout the year. This income will be reported when completing a 2022 tax return in 2023. The income may or may not be taxable depending on a variety of rules. Generally, if selling used items for less than original cost or if selling a few items like at a garage sale, the income likely will not create a taxable situation. Those purchasing items for resale through eBay or similar online means will need to account for the income and pay appropriate income and self-employment taxes. By receiving the 1099-K the income will need to be reported. First, check the total amount reported as it likely will not include any credits, discounts or refunded amounts. Make sure the income is not reported somewhere else on the tax return.
If self-employed most likely the income will be reported on Schedule C. If receiving multiple 1099-Ks be sure to report the total of all of them. Make sure the 1099-K(s) are accurate and the income is all yours and not part of a partnership or other business income
Failure to report the income may cause the IRS to send a CP2000 notice and charge the tax they think is owed along with possible penalties and interest.
Annual Gift Tax Exclusion
In 2022 the annual gift tax exclusion increased from $15,000 to $16,000. There are no reporting requirements for gifts of cash or property of less than $16,000 per person. Example: a couple could give a child up to $32,000 ($16,000 each) per year. When the limit is exceeded, reporting is required. However, no tax is typically paid. The excess gift reduces the donor’s estate tax exemption which is currently $12,060,000. Generally, unlimited gifts can be made to pay for tuition or qualified educational and medical expenses.