Parental Custody & Tax Credits: What You Need to Know

Parental Custody & Tax Credits: What You Need to Know

Do you have a legal agreement with your child’s other parent about who claims the child on their taxes? If so, you may have some questions about how to handle the Child Tax Credit and the 2021 Recovery Rebate Credit when filing your tax return.

Economic Impact Payments and the Recovery Rebate Credit

The third Economic Impact Payment (EIP) was an advance payment of the 2021 Recovery Rebate Credit. The IRS used your 2020 or 2019 tax information to determine eligibility and amounts. Here’s what that means for you:

  • If you did NOT receive a third-round EIP for a child you will be claiming on your tax return, you can claim the Recovery Rebate Credit, regardless of any EIP the other parent received.
  • If you DID receive a third-round EIP for a child you will NOT be claiming on your tax return, you are NOT required to pay back the EIP if, based on the information reported on your 2021 tax return, you should have received less.

Child Tax Credit

The IRS determined who received 2021 Advance Child Tax Credit payments based on the information on your prior-year’s tax return. So if you claimed the Child Tax Credit on your 2020 return, you would have received the Advance Child Tax Credit payments in 2021. Here’s what that means for you: 

  • If you knew you would not claim a child on your 2021 return, you had the option to unenroll from receiving monthly payments. If you did NOT unenroll and received monthly payments last year for a child you won’t be claiming on your 2021 tax return, you may have to repay those payments when you file. You may be excused from repaying some or all of the excess amount if you qualify for repayment protection.
  • If you were an eligible parent who did NOT receive advance payments for your child, you will be able to claim the full amount of the Child Tax Credit on your 2021 tax return — even if the other parent received Advance Child Tax Credit payments.

Where Do You Stand?

The rules on economic impact and child tax credit payments can be confusing. If we’re preparing your taxes for you, we’ll make sure to take advantage of every tax credit available to you. Please don’t hesitate to call us at 706-632-7850 with any questions.

 

Start 2022 Off Right by Checking Your Withholding

If you’re getting back a large tax refund, that only means that you’ve been giving the IRS more money from each paycheck than you should. Since you don’t earn interest on that money, you should not be using that as a way to save. It’s often smarter to have less money withheld from your paycheck and sock it away in a savings account that pays you interest.

On the other hand, if you owe a lot on your taxes, then you should be having more money taken out of your paycheck, or you should be making quarterly estimated payments. Not paying enough taxes throughout the year can incur fees and penalties, adding to your tax bill.

Get the new year off to a good start by checking your federal income tax withholding and adjusting it if necessary. You can use the IRS’ Tax Withholding Estimator to help you figure the right amount of tax to withhold, whether you’re an employee or self-employed. To use the tool, you’ll need to estimate:

  • Your 2022 income.
  • The number of children you will claim for the child tax credit and earned income tax credit.
  • Other items that will affect your 2022 tax return.

If you have more complicated income and expenses, such as pension income or long-term capital gains, you will not get a valid result using the Tax Withholding Estimator. Instead, contact us for help determining the appropriate withholding for your situation.

Tax Checklists & Deadlines

Please note the following deadlines for providing your materials to us:

  • March 1: Corporate/Partnership Tax Returns to file by March 15 (without extension).
  • March 25: Personal Tax Returns to file by April 18 (without extension).

You may bring your paperwork to our office during regular business hours, or drop it off in our after-hours dropbox. To make sure you provide everything we need, please use our 2021 Tax Preparation Checklist (Personal and/or Business):

IRS Video Tax Tip

Don’t have all the documents needed to file your return? Watch this tax tip for information on what to do.

Retirement and Taxes: Understanding Your IRA

Retirement and Taxes: Understanding Your IRA

Retirement may be closer than you think — especially if you’re saving money now just for that purpose. An Individual Retirement Arrangement (IRA) can be a smart way to save because it provides tax incentives to help you on your path. And IRAs are easy to set up with a bank or other financial institution, a life insurance company, a mutual fund or a stockbroker.

What You Need to Know About IRAs

If you have a Traditional IRA, you may be able to deduct your contributions from your taxes. Also, the interest and dividends earned in a Traditional IRA are not taxed until you withdraw them, typically when you’re retired and in a lower tax bracket.

If you have a Roth IRA, you are subject to similar restrictions as with a Traditional IRA. However, you cannot deduct your contributions. But qualified distributions from a Roth IRA are typically tax-free. And Roth IRAs do not require withdrawals until after the death of the owner.

 A SIMPLE (Savings Incentive Match Plan for Employees) IRA or SEP (Simplified Employee Pension ) IRA can be set up for employees and employers to make contributions. These are often popular with smaller businesses. Ask your employer if one is available.

A CONTRIBUTION is the money that you put into your IRA. There are annual limits to the amount you can contribute depending on your age, income and type of IRA (see below for new 2022 limits).

A DISTRIBUTION is the amount you withdraw from your IRA. Keep in mind that you may face a 10% penalty and a tax bill if you withdraw money from your IRA before you turn 59½, unless you qualify for an exception. There are also required distributions from an IRA — in most cases, you generally must start taking withdrawals when you reach age 70½.

If you have one or more IRAs, you’ll need to let us know how much you contributed and/or withdrew during the year when we file your taxes next spring. Be sure to keep all the important paperwork related to your accounts. If you have any questions, we’ll be happy to help — just contact us here.

Retirement Plan Limits Increase for 2022

Due to cost-of-living adjustments, retirement plan contributions are increasing for tax year 2022. For example, the amount you can contribute to your 401(k) plan for 2022 will increase to $20,500, up from $19,500 for 2020 and 2021. This also includes 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. The amount you can contribute to a SIMPLE retirement account increased to $14,000, up from $13,500.

The income phase-out ranges for deductible Traditional IRA contributions are increasing for 2022:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range increases to $68,000-$78,000, up from $66,000-$76,000.
  • For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, to $109,000-$129,000, up from $105,000-$125,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, to $204,000-$214,000, up from $198,000-$208,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, it remains $0-$10,000.

The income phase-out range for Roth IRA contributions is increasing:

  • For singles and heads of household, to $129,000-$144,000 up from $125,000-$140,000.
  • For married couples filing jointly, to $204,000-$214,000, up from $198,000-$208,000.
  • For a married individual filing a separate return, it remains $0-$10,000.

The income limit for the Saver’s Credit (Retirement Savings Contributions Credit) for low- and moderate-income workers is increasing:

  • To $68,000 for married couples filing jointly (up from $66,000).
  • To $51,000 for heads of household (up from $49,500).
  • To $34,000 for singles and married individuals filing separately (up from $33,000).

Know Your Contribution Limits

The limit on the amount you can contribute annually to your IRA remains unchanged at $6,000. The IRA catch-up contribution limit for those age 50+ also remains at $1,000. The catch-up contribution limit for employees age 50+ for 401(k), 403(b), most 457 plans, and the Thrift Savings Plan remains unchanged at $6,500. Therefore, those 50+ can contribute up to $27,000 starting in 2022. The catch-up contribution limit for employees age 50+ and for SIMPLE plans also remains unchanged at $3,000.

Are You Eligible for the ODC?

The Credit for Other Dependents (ODC) is a tax credit for qualifying dependents who can’t be claimed for the Child Tax Credit. The maximum credit amount is $500 for dependents who meet these conditions:

  • Age 17 or older.
  • Have individual taxpayer identification numbers or Social Security numbers.
  • Are dependent parents or other qualifying relatives you support.
  • Are living with you but are not related to you.

You can claim this credit if:

  • You claim the person as a dependent on your tax return.
  • You cannot use the dependent to claim the Child Tax Credit or Additional Child Tax Credit.
  • The dependent is a U.S. citizen, national or resident alien.

You can claim the Credit for Other Dependents in addition to the Child and Dependent Care Credit and the Earned Income Credit. Note that the credit begins to phase out, however, when your income is more than $200,000 ($400,000 for married filing jointly).

Let us know if you support other dependents in your household, and we’ll help you determine which credits apply on your next tax return.

IRS Video Tax Tip

If you have taxable income from any payer that doesn’t withhold tax for you, check out this IRS video to see if you need to make estimated tax payments.

FAQs About the Advance Child Tax Credit

FAQs About the Advance Child Tax Credit

We’re still getting questions from some folks about the Advance Child Tax Credit that they are receiving. Read below for some answers to common questions we’ve received.

Q: What is it?

A: The Advance Child Tax Credit provides you with an ADVANCE payment of the child tax credit you can claim on your 2021 tax return (filed in early 2022). It is not extra money provided by the government, but rather just an advance of the amount you would typically receive as part of your refund next year.

Q: How is this different than the previous Child Tax Credit?

A: Previously, you had to wait until you filed your tax return to receive the credit. This year, as part of COVID-19 tax law changes, you may receive the credit in monthly payments from July through December. What’s more, the amount has been increased for 2021 only to $3,600 for children under age 6 and to $3,000 for children between 6 and 17.

Q: Who qualifies?

A: You may receive these payments if your dependent child, stepchild, foster child, sibling or other dependent relative does not turn 18 before January 1, 2022, and also:

  • Does not provide more than half of his or her own support during 2021.
  • Lives with you for more than half of tax year 2021.
  • Is a U.S. citizen, U.S. national, or U.S. resident alien.

Q: Can I stop the payments?

A: Yes. If you don’t want to receive the monthly Advance Child Tax Credit payments because you would rather claim the full credit when you file your 2021 tax return, or because you will not be eligible for the credit, you can unenroll through the Child Tax Credit Update Portal. (Note: If you are married and file jointly, BOTH you and your spouse must unenroll individually.)

Q: Will receiving the Advance Child Tax Credit payments affect my other government benefits?

A: No. These payments cannot be counted as income to determine if you are eligible for benefits or assistance, or how much you can receive under any federal, state or local program.

Q: Are the Advance Child Tax Credit payments taxable?

A: No. Because these payments are an advance on your 2021 child tax credit, they are not income and will not be reported as income on your 2021 tax return. However, the total amount of payments you receive is based on the IRS’s estimate of your 2021 child tax credit (generally using information from your previous tax returns). If you receive more in payment than you are eligible to claim on your tax return, you may have to repay the excess amount.

More Questions? Ask Us!

If you have additional questions about the Advance Child Tax Credit, don’t hesitate to contact us. We’ll be happy to help you work through the details. You may also check the IRS’s website for more details.

Premier CPA Services 10 year anniversary logo

May 31 was our 10-Year Anniversary! To celebrate, we will be offering some great giveaways to our clients and Facebook friends. Be sure to follow us and stay tuned!

IRS Issues ERC Safe Harbor

The IRS issued a safe harbor allowing employers to exclude certain amounts from their gross receipts solely for determining eligibility for the Employee Retention Credit (ERC). As an employer, you can elect to apply the safe harbor by excluding these amounts to determine whether you are an eligible employer for a calendar. These amounts include:

  • The amount of the forgiveness of a Paycheck Protection Program (PPP) Loan;
  • Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
  • Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.

You are not required to apply this safe harbor, but may do so on your employment tax return (Form 941 or Form 941-X). If you have questions about the ERC, just give us a call at 706-632-7850.

Social Security 2020 Annual Report

Last year, Social Security paid benefits of $1.096 trillion to approximately 65 million beneficiaries. Meanwhile, an estimated 175 million people paid into Social Security through payroll taxes.

However, the Social Security Administration projects its total annual costs in 2021 will exceed its total annual income for the first time since 1982. And if Congress does not act soon, trust fund reserves will be depleted:

  • Old-Age and Survivors Insurance (OASI) will be depleted in 2033, with 76% of benefits payable at that time.
  • Disability Insurance (DI) Trust Fund will be depleted in 2057, with 91% of benefits still payable.

Video Tax Tip

The IRS Small Business Tax Workshop is a series of online training videos covering tax topics for new and established small business owners.

Do You Have Children? You May Start Receiving Monthly Child Tax Credit Payments in July

Do You Have Children? You May Start Receiving Monthly Child Tax Credit Payments in July

If you have one or more children age 17 or under, you may automatically begin receiving advance payments of the Child Tax Credit on July 15th. Roughly 39 million households — covering 88% of children in the United States — will begin receiving the payments as part of The American Rescue Plan Act, which was passed in March.

The new law increased the maximum Child Tax Credit (for 2021 only) to $3,600 for children under age 6 and to $3,000 for children between 6 and 17. As a result, eligible families will receive a payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 to 17. Payments will continue monthly on the 15th of each month — via direct deposit, paper check or debit card — through the end of the year.

Other Details Include:

  • The payments are an advance of any credit due on your 2021 tax return. (Keep in mind this may reduce the amount of your tax refund next year, or even trigger the need to pay back some of the funds if your financial situation changes significantly.)
  • The credit for qualifying children is fully refundable, which means you can benefit from the credit even if you don’t have earned income or don’t owe income taxes.
  • The credit will include children who turn age 17 in 2021.
  • The amount of the CTC was previously up to $2,000 annually per qualifying child under the age of 17.
  • The increased amounts are phased out if your income is over $150,000 (married filing jointly or qualifying widow/widower), $112,500 (head of household) or $75,000 (all others).
  • The advance payments will be made monthly from July through December as long as you live in the U.S. for more than half the year. The total of the advance payments will equal up to 50% of the full Child Tax Credit, and will be estimated from your 2020 tax return (or 2019 return if 2020 is not yet filed).

More to Come

The IRS is sending out letters to families it believes qualifies for the credit. If you qualify, you do not need to take any action to get your payment.

Later this summer, the IRS will be adding a Child Tax Credit Update Portal to its website. You can use the portal to notify the IRS of changes in your income, filing status or number of qualifying children, or update your direct deposit information. You will also be able to unenroll from receiving the advance payments (and instead receive the full amount of the credit when you file your 2021 return next year) if you wish.

Additional information on how you can access the Child Tax Credit can be found on the IRS website at IRS.gov/childtaxcredit2021. Feel free to contact us if you have any questions about how the credit will affect your 2021 tax return.

Premier CPA Services 10 year anniversary logo

May 31 was the 10-Year Anniversary of Premier CPA Services! Over the next few months, we will be offering some great giveaways to our clients and Facebook friends to celebrate! Be sure to follow us and stay tuned!

Extension Date: Still October 15th

Please note that if you filed an extension with the IRS, the due date for your federal income tax return is still October 15. Although the original tax deadline was moved from April 15th to May 17th, the extension deadline has NOT changed. In order to complete your taxes to meet the October 15th deadline, we will need all your paperwork by Friday, September 24th.

Payroll & Accounting Services Available

You may count on Premier CPA Services to file your personal and/or business taxes each year. And for that, we say “Thank You!” But did you know that we also offer Payroll and Accounting Services?

We can handle your employee payroll through MyPay, as well as in-house live payroll, no matter how many employees you have (whether one or 100!). We can also handle your after-the-fact payroll — processing all the necessary forms, and relieving you of the burden of all that tedious paperwork.

For more details, contact Amber at amber@premiercpaservices.com or call (706) 632-7850. It’s easy to get started, and can save you a ton of time and effort.