Tax Tips from Tax & Accounting Plus – Part 3

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New Tax Tips are released weekly. Contact Tax & Accounting Plus to schedule your appointment today by calling 309-827-4010.


THE EARNED INCOME CREDIT

You may be eligible for earned income credit this year if:

  1. Your earned income is less than $42,158 ($48,108 if MFJ) and you have one qualifying child. You may be eligible to receive up to $3,618 of EIC.
  2. Your earned income is less than $47,915 ($53,865 if MFJ) and you have two qualifying children.  You may be eligible to receive up to $5,980 of EIC.
  3. Your earned income is less than $51,464 ($57,414 if MFJ) and you have three qualifying children.  You may be eligible to receive up to $6,728 of EIC.
  4. Your earned income was less than $21,430 ($27,380 if MFJ) and you are at least age 19*, 24* or 18*. You may be eligible to receive up to $1,502 of EIC.  Individuals over age 65, for 2021, this age limit is eliminated.

*Effective for 2021 only, the applicable minimum age is lowered to:

  • Age 19 if the taxpayer is not a specified student, qualified former foster youth, or qualified    homeless youth.
  • Age 24 if the taxpayer is a specified student, but is not a qualified former foster youth, or qualified homeless youth.
  • Age 18 if the taxpayer is a qualified former foster youth or a qualified homeless youth.

Specified Student. A specified student is an individual who is an eligible student under the American Opportunity Credit rules (at least a half-time student) for at least five months during the year.

Qualified Former Foster Youth. A qualified former foster youth means an individual who was in foster care on or after age 14 under part B or E of title IV of the Social Security Act.

Qualified Homeless Youth. A qualified homeless youth means an individual who certifies that he or she is either an unaccompanied youth who is a homeless child or youth, or is unaccompanied, at risk of homelessness, and self-supporting.

Married Filing Separately. Prior to 2021, the Earned Income Credit was not allowed if the taxpayer was married and filed a separate return.  Effective for all tax years beginning after December 21, 2020, an individual is not treated as married if such individual:

  • Is married and does not file a joint return for the tax year,
  • Resides with a qualifying child for more than one-half of the tax year, and
  • During the last six months of the year, does not have the same principal place of abode as his or her spouse, is not a member of the same household with his or her spouse by the end of the tax year, and has a decree, instrument, or agreement (other than a decree of divorce).

Failure to meet qualifying child tax ID requirement. Effective  for  all  tax  years  beginning  after  December 31, 2020, taxpayers who have one or more qualifying children that do not meet the taxpayer identification number requirement are allowed to claim the Earned Income Credit under the no qualifying children rule.

Investment Income Limit. Effective for all tax years beginning after December 31, 2020, the investment income limitation for the Earned Income Credit is increased to $10,000. This amount will be adjusted for inflation after 2021.

Effective for the 2021 tax year only, if the earned income for 2021 is less than the earned income for 2019, the taxpayer may elect to use 2019 earned income when calculating the 2021 EIC.

NOTE:  Please bring some sort of documentation for each child indicating they lived with you in 2020, i.e. school record, medical statement, piece of mail, etc.

A Qualifying Child of More Than One Person.  If a child meets the rules to be a qualifying child of more than one person, only one person can treat that child as a qualifying child and claim the EIC using the child.  You and the other person can decide who will claim the credit using that qualifying child.  Ask your preparer at Tax & Accounting Plus for details.

Gift Exclusion.  The annual exclusion for gifts made to a donee during 2021 is $15,000 and will increase to $16,000 for 2022.

Day Care Providers.  Family day care providers can choose to use a standardized rate to claim a deduction for meals.  The rates are Breakfast – $1.39, Lunch/Dinner – $2.61 and Snack – $.78. The standard rate is allowed for up to 1 breakfast, 1 lunch, 1 dinner & 3 snacks per day per child, provided the meals & snacks are actually purchased & served.

Retirement Savings Contributions Credit.  Depending on modified AGI, the credit amount is either 10%, 20% or 50% of eligible contributions.  The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 for MFJ). Use the following chart to calculate the credit.

RateMFJHOHSingle, QW, MFS
50%$0 – $39,500 $0 – $29,625 $ 0 – $19,750
20% $39,501 – $43,000 $29,626 – $32,250 $19,751 – $21,500
10% $43,001 – $66,000  $32,251 – $49,500 $21,501 – $33,000
0% Over $66,000 Over $49,500 Over $33,000

Contributions are reduced by any distributions from the above plans received by the taxpayer(s) from January 1, 2018 through the due date (including extensions) of your 2021 return.

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