Enhanced Child Tax Credit for 2021

Tax rule changes in recently-passed Congressional bills in response to the pandemic are head-spinning. Overall, these changes provide targeted financial support and tax relief for people who have suffered financial hardship because of COVID-19. The IRS just came out with guidance on one of these changes, an enhanced Child Tax Credit. Temporary changes to the Child Tax Credit are intended to provide relief to taxpayers with eligible dependent children and bridge the financial gap until the American economy recovers.

The enhanced Child Tax Credit is part of the $1.9 trillion American Rescue Plan that President Joe Biden signed into law in March 2021. Formally called Child Tax Credit Improvements for 2021, families need to know about its valuable provisions:

  • Child Tax Credit increases are in effect for 2021 only.
  • The Child Tax Credit is increased from $2,000 to $3,000 per eligible child, for children who are age 6 and older.
  • For children under the age of 6, the Child Tax Credit is increased to $3,600 per eligible child.
  • The age for qualifying children has also been increased from children under age 17 to children under age 18. This change allows more children to be considered eligible for the Child Tax Credit.
  • The Child Tax Credit is fully refundable, meaning that eligible taxpayers could receive a tax refund that exceeds her or his tax federal withholding.
  • Income limitations for the Child Tax Credit remain at $200,000 for single taxpayers and $400,000 for married filing joint. The income limitation for the Additional Child Tax Credit is phased out by $50 for every $1,000 of modified adjusted gross income more than the threshold (e.g., $150,000 married filing joint).
  • Advance payments of one-half of the eligible Child Tax Credit will be issued in equal periodic payments from July to December 2021. Any eligible Child Tax Credit not paid in advance will be received when the taxpayer files her or his 2021 income tax return.

Guidance on the new tax rules for the enhanced Child Tax Credit is fresh off the presses. The IRS plans to post more information on its website (www.irs.gov), along with a portal for taxpayers to change personal information that may impact the amount of the advance payments, like the birth of a child or a change in which separated or divorced parent claims the child as an eligible dependent. 

These enhancements to the Child Tax Credit for 2021 are temporary. Knowing the valuable rule changes can help to bridge the financial gap for many American families.

Business Meal Deduction Update

Legislation recently passed by Congress for COVID-19 relief contains some tax rule changes that are intended to encourage taxpayer spending. One change that took effect January 1, 2021, temporarily increases the business deduction for meals from 50% to 100% until the end of 2022.  The deduction increase could provide business owners the incentive to enjoy a not-from-home meal while conducting business activities.

As usual, the temporary rules are not simple. The IRS guidance recently announced the details and definitions needed by taxpayers to follow the rules while also doubling their business meal deductions: 

  1. The temporary rules apply to any expense paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant.
  1. The term “restaurant” means a retail business that “prepares and sells food or beverages for immediate consumption.” The food or beverages can be consumed on the restaurant’s premises, carried out, or delivered. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, like a grocery store or a vending machine.
  1. An employer may not treat an on-site eating facility as a restaurant under the temporary rules, either employer-operated or operated by a third party.

Those temporary rules are in addition to all the other rules that aren’t changing for 2021 and 2022, including:

  1. Business owners also need to be present for the meal and be engaged in conducting business activities. Alternatively, the business owner must be represented by an individual who is connected to the business, such as an employee or contractor.
  1. Meals cannot be lavish or extravagant under the circumstances. 
  1. As always, a documented record must be kept of the date, amount, business purpose and attendees at the meal.

Not simple at all. But it could be worth your time to learn about the temporary rules for deducting business meal expenses. It could double your business meal deduction! Need more details? The IRS has it for you here – https://www.irs.gov/pub/irs-drop/n-21-25.pdf.

Another IRS Impersonation Scam

Impersonating the IRS is a favorite way for scammers to intimidate their victims. Who isn’t afraid of the IRS? It’s gotten even worse recently with all those tempting Economic Impact Payments and other COVID-19 funding just waiting to be stolen. Email phishing scams allow criminals to hit thousands of potential victims in seconds, and then sit back and watch how much money they can reel in.

At the end of March, the IRS warned about another IRS impersonation scam that targets educational institutions, including students and staff who have “.edu” email addresses. The scam emails display the IRS logo and use various subject lines to get potential victims’ attention, such as “Tax Refund Payment” or “Recalculation of your tax refund payment.” 

The phishing emails ask people to click a link and submit a form to claim their refund. Who wouldn’t want a refund, right? The problem is, the link asks for all kinds of personal information, like:

  • Social Security number
  • First Name
  • Last Name
  • Date of Birth
  • Prior Year Annual Gross Income (AGI)
  • Driver’s License Number
  • Current Address
  • City
  • State/U.S. Territory
  • ZIP Code/Postal Code
  • Electronic Filing PIN

The IRS would never ask for personal information. So, what should you do with a scam email?

  • Do Not Open or Click

Resist temptation to open or reply to any suspicious email, no matter how enticing. And don’t even think about clicking on a link in a suspicious email!

  • Report to Authorities and Delete

Report phishing emails to the Federal Trade Commission at www.ftc.gov/complaint and to the Anti-Phishing Working Group at [email protected]. Forward tax-related emails to the IRS at [email protected]. After reporting, delete the original email.  

Need more protection and detection help? The IRS has it for you here – https://www.irs.gov/businesses/small-businesses-self-employed/tax-scams-how-to-report-them and the Federal Trade Commission has more for you here – https://reportfraud.ftc.gov/#/?pid=A.

About the Home Office Deduction

Tax clients ask me all the time about taking a home office deduction. That topic has come up even more often since COVID-19 has so many people working at home. However, everyone with an office at home isn’t eligible for a home office deduction, even if she or he owns a business. Lots of rules apply. It can be pretty confusing. 

So, let’s “un-confuse” the topic:

  1. Who is eligible for a home office deduction?

Only individuals who own a business are eligible for the deduction. Yes, some employees used to be eligible under special circumstances, but those rules changed at the end of 2017. Now, only business owners who use space in her or his home exclusively and regularly to substantially conduct business operations can consider taking a home office deduction. No non-business activity can be conducted in a home office. That means no personal items in the home office, even clothes in the closet.

  1. What home expenses can be deducted?

Deductible home office expenses are either direct or indirect, based on the expense type and business percentage of the home used for business. The most common method used to calculate the business percentage is dividing the square footage used exclusively for business by total square footage. Shared spaces, like hallways, cannot be included in office space.  

  • Direct Expenses: Expenses that benefit only the home area that is exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.
  • Indirect Expenses: Expenses for keeping up and running the entire home, such as the mortgage interest, real estate taxes, insurance, utilities, and general repairs are deductible based on the business use percentage, described above.

Expenses to maintain the non-living home space, such as lawn care, are not deductible. For business owners who don’t want to hassle with tracking all the various home office expenses, the IRS has a Simplified Option that allows a standard deduction of $5 per square foot, limited to 300 square feet.  

Eligibility for a home office deduction is determined by a lot of rules that can be confusing. We address the basics here, but there’s more to it. Details and examples are on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction.