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How COVID Impacted the IRS and Your Taxes!

Thanks to the COVID-19 pandemic, this was the first time in three years that we had to meet a mid-April deadline to file our taxes. Now that tax season is over, let’s reflect on some of the ways COVID has shaped our tax laws.

Stimulus Checks

In 2021, we saw the final round of COVID stimulus checks. This was, of course, the second year involving stimulus checks, and the biggest issue people had was tracking down and figuring out how much they received, or whether they got a check at all.

A typical young family of four—mother, father, two kids under age 6, and an annual income of $120,000—should have received a stimulus check of $5,600 last year. If you didn’t get a check but later became eligible for one, there’s a way to claim it on your tax return. Contact our tax preparation specialists to learn more.

Expanded Child Tax Credits

Unlike the stimulus checks, which went out multiple times in 2020 and again in 2021, the expanded Child Tax Credit only applied in 2021. The credit in 2020 was $2,000 per child under age 16. In 2021, this amount bumped to $3,600 per child under age 6 and $3,000 per child between ages 7 and 17.

That’s another $3,200 above the norm for that family of four with two kids under age 6. So you’re looking at $8,800 of extra cash that the family has to spend.

Expanded Child and Dependent Care Credit

The expanded Child and Dependent Care Credit was another one-and-done change for 2021. Previously, the credit was 35% of the first $3,000 in care expenses per qualifying person for up to two qualifying people. This expanded to 50% of the first $8,000 in care expenses for one qualifying person (for a $4,000 credit) and 50% of $16,000 in care expenses (for an $8,000 credit) for two or more qualifying people.

This means the credit went from a maximum of $2,100 to a maximum of $8,000. That’s yet another $5,900 above the norm for that family of four. Add this to the expanded Child Tax Credit and the stimulus checks, and that’s a total payment from the US government of $14,700 in a single year.

When you add up the numbers for all the qualifying families in America, it is a crazy, crazy amount. We’re not sure who’s going to pay for that, but apparently, they have it all figured out in Washington.

Coronavirus-Related Distributions

This change waived the tax penalty for early withdrawal of up to $100,000 from a retirement account in the calendar year 2020. It also allowed you to spread out that income over three years—2020, 2021, and 2022. Unless you elected to receive the entire amount in 2020, one-third of the withdrawal amount should have come in for 2020 and 2021, and you can expect the final third in 2022.

Charitable Contributions

One way to support a charitable cause and get a tax benefit is to make a qualified charitable distribution. This is when you take a required minimum distribution from your retirement account and give it straight to charity.

Similarly, for the 2021 tax year, you can make additional charitable contributions as part of the standard deduction. Single filers can deduct $300 in cash donations, and married couples can deduct $600. This change has been renewed and will continue into 2022.

For the tax years 2020 and 2021, you had the option to make and deduct larger charitable contributions. There was no limit on the amount you could give and claim on your taxes.

Business Meal Write-Offs

Traditionally, you can only write off 50% of the cost for business lunches and dinners, but for the tax years 2021 and 2022, this has become a 100% write-off.

So those are the big changes we saw on our 2021 tax returns. Some will carry over to next year, but many were one-time changes resulting from the COVID-19 pandemic. For more help understanding these changes and preparing your taxes as cost-effectively as possible, please contact Nelson Financial Planning in Winter Park, FL, at 407-629-6477.