Last year may have felt like nothing more than an extension of 2020 — a slog of Zoom meetings, testing lines and will-we-or-won’t-we return to office plans. But 2021, the first full year of the pandemic, may look different when it comes to your taxes.
You may have collected a third stimulus check and a more generous child tax credit, including some of it in advance. You may not have stepped foot into your workplace for an entire year, and decamped to a different state. Or maybe you jumped into the meme stock pandemonium, putting you among the millions of Americans who started trading stocks last year.
If you’re worried about tax surprises, this is your guide to what to watch out for. And here’s some good news: You have a couple of extra days to sort it all out. For most taxpayers, returns must be filed online or postmarked by April 18.
What if I’m missing a stimulus payment, or think I am eligible for more?
Now is your chance to recover it, using the so-called 2021 Recovery Rebate Credit.
The economic impact payments that went out in March 2021 were for up to $1,400 per person, including dependents. Individuals with adjusted gross income up to $75,000 ($112,500 for individuals filing as a head of household) and married couples filing jointly with income up to $150,000 qualified for the full check.
Payments phased out at $80,000 for singles, $120,000 for household heads and $160,000 for joint filers. But if you welcomed a new child or experienced a drop in income, you may be entitled to more than you received. (If you received too much, you don’t need to pay it back.)
Those who received payments should have gotten a form listing the amount, Letter 6475. You can also find the information by setting up an individual online account on the I.R.S. website. (Spouses filing jointly will have separate accounts.)
How will the expanded child tax credit affect me?
For 2021, the total credit for eligible families rose to as much as $3,600 for each child under 6 and up to $3,000 for ages 6 to 17. The credit also became fully refundable, so taxpayers can receive the money even if they owe no federal income tax.
The other change: You could receive half the credit upfront, in the form of monthly payments. Whether you took those payments or opted out, you’ll have to enter the amount you received on your return — even if it’s zero. (Joint filers will have to add theirs together.)
You should have received a form, I.R.S. Letter 6419, with this information. It, too, can be found by setting up an online I.R.S. account. Check the letter against your bank account — some letters may be inaccurate.
Some households will need to repay some or all of the advance: The payments were generally based on the prior year’s tax return and could have been too high if your situation changed significantly. There are repayment protections for lower- and middle-income households.
What’s happening with the child and dependent care credit?
This tax break helps many working parents offset the cost of caring for younger children and other dependents. Pandemic legislation made it far more generous, but only for 2021.
The dollar amount of qualifying expenses nearly tripled, and the percentage of those expenses that can be applied to the credit rose to 50 percent from 35 percent. It also lifted income ceilings on when the credit begins to phase out, making more families eligible.And because it became a fully refundable credit in 2021, you may receive money back even if you have no tax liability.
Filers can’t double dip, though: If you set aside pretax money through an employer-provided flexible spending account or your employer paid for child care, payments made with those funds aren’t allowable expenses.
Are my health and dependent care flexible spending accounts any more flexible this year?
They might be, if your employer chose to make pandemic-related changes. Employers can allow workers to carry over unused balances from 2021 into 2022, just as they did last year.
You can also use health care flexible spending money to pay for masks, sanitizing wipes and other personal protective equipment, which now qualify as a medical expense for tax purposes.
I was lured into the meme stock madness. What do I need to know?
The federal government is coming for its share of your winnings. If you were trading in a regular brokerage account (and not a tax-advantaged individual retirement account, for example) and made a profit, you may owe capital gains taxes.
Short-term gains — those realized after selling shares held for one year or less — are taxed at your ordinary income rate. The more favorable long-term rate kicks in when shares are held for more than a year. (Higher-income investors will often owe an added “net investment income tax” of 3.8 percent on gains, regardless of how long they held the stock.)
Losses offset winnings, and up to $3,000 in net capital losses can be deducted from your ordinary income. Any remaining losses carry into future years.
There’s a catch that could surprise many amateurs, known as wash sales. If, for example, you sold shares at a loss and then quickly bought them back again,the initial loss can’t be used to offset other gains. Your brokerage should have sent you a Form 1099-B laying out your gains, losses and disallowed wash sales.
If you quit your job to trade full time, you could potentially qualify for what’s known as trader tax status. Robert A. Green, chief executive of Green Trader Tax, which specializes in tax planning for traders, said that status could allow you to deduct some significant expenses and take advantage of other benefits. (You can get more flexibility on wash sales, too, but it’s now too late to get that for 2021).
I continued to work from home. Can I write off certain expenses?
Probably not, unless you were self-employed, a gig worker or an independent contractor.
Not even part of the phone bill? A desk chair? “That is still going to be a no, unless you have a business of your own,” said Cherie Mason, president of Cornerstone Tax and Financial Solutions in Denver.
The home office deduction was eliminated in late 2019 for employees from 2018 through 2025. So if you receive a paycheck or W-2 exclusively from an employer, you’re out of luck.
I worked outside my home state. Does that matter?
Yes, and it could get complicated — each state has its own rules related to remote work.
In certain situations, you could end up owing taxes to more than one state. You generally pay income taxes to the state where you work (even temporarily), but your home state can levy taxes of its own.
This may mean filing two state returns, although many states have reciprocity agreements that permit people to work in another state without having to file a nonresident return. (A glaring exception: New York, New Jersey and Connecticut do not have such pacts.)
But this doesn’t usually result in double taxation: All states allow residents to take a credit on their tax return for income taxes they paid to other states, said Tim Bjur, an analyst for Wolters Kluwer.
If you didn’t notify your human resources or payroll department that you were temporarily relocating, you will need records of where you worked and when. For example, if you temporarily moved to Florida (which doesn’t impose a state income tax) from New York (which does), you’ll need to prove your Florida residency.
“Where they are allocating their income to becomes important because of the different state tax rules” and rates, said Jody Padar, head of tax strategy at April, which provides tax software to banks.
I moved. Is there anything special I can deduct?
Probably not. Most people can no longer deduct moving expenses, unless they are a member of the armed forces.
I collected unemployment last year. Are those benefits taxable?
Unfortunately, yes. Unemployment insurance is generally subject to federal income tax — a partial shield for 2020 wasn’t carried into 2021 — but some states don’t tax it, according to the Tax Foundation. Either way, you won’t owe the payroll taxes that fund Social Security and Medicare.
Taxes for unemployment aren’t automatically withheld from the payments — recipients must opt in. But even when they do, it’s not always enough. It can be “a big shock,” said Dan Herron, an accountant and financial planner in San Luis Obispo, Calif.
Unemployment recipients should receive Form 1099-G showing how much they received and any taxes withheld.
My student loan was forgiven. Are there tax consequences?
You’re (probably) in luck. A forgiven loan amount is generally counted as taxable income, but recent legislative changes make an exception for most student loan borrowers whose debt has been erased from 2021 through 2025, according to Wolters Kluwers.
This covers loans forgiven because borrowers were defrauded by their schools or they qualified under the expanded Public Service Loan Forgiveness program.
Many — but not all — states mirror the federal government’s treatment, so you may owe state tax.
Is student loan interest still deductible?
Yes, but federal borrowers may have less to deduct because the government hasn’t charged interest on most loans since March 2020.
Borrowers can generally deduct up to $2,500 in interest on qualified student loans, subject to certain income limits, even when they don’t itemize deductions. But the pause means many people aren’t paying anything.
Interest accrued on other eligible loans, including certain federal loans not owned by the government and those made by private companies, can be deducted as usual.
What about charitable contributions?
You can deduct up to $300 in cash contributions ($600 for joint filers) to qualifying charities for the 2021 tax year, even if you don’t itemize deductions. People who take the standard deduction usually can’t do this.
And filers who itemize can deduct up to 100 percent of their adjusted gross income for cash contributions made in 2021. The maximum had been 60 percent.
Has the earned-income tax credit changed for 2021?
The earned-income credit, which benefits lower- and middle-income households, became more generous and flexible. Expanded age limits covered more childless people, and the size of the credit nearly tripled for these taxpayers.
Filers can also swap in their 2019 income to calculate the credit if it will generate a larger benefit than if they used their 2021 income. This may help people who were out of work for long stretches of 2021.
There are more tweaks for 2021 and future years, including allowing more working households that also have some investment income to claim the credit.
