According to a recent survey by YouGov, more than half of Americans are unsure how their stimulus payments affect their taxes. In addition to this, the IRS pushed back the start of tax filing (without extending the deadline), leading to a much shorter tax season. And this isn’t even looking at those big tax changes affecting business and corporations specifically.

It’s true that some of these changes can be confusing. The reality of filing your taxes in 2021 isn’t something that most people foresaw or even anticipated. That’s why expert tax and financial advice from a professional will go a long way in ensuring that you achieve your financial goals through accurate and timely tax preparation.

#1. Your stimulus payment comes with a credit too.

Economic Impact Payments (a.k.a stimulus checks)

What it was for Tax Year 2019

This was specifically set up as financial relief for those affected by the COVID-19 pandemic. Therefore it wasn’t in effect for those filing their 2019 taxes last year.

What it is for Tax Year 2020

If you didn’t receive your Economic Impact Payments (aka stimulus checks), you can claim them on your 2020 tax return through the Recovery Rebate Credit. The credit will either increase your tax refund or reduce the amount you owe. In addition, the credit will apply to both the first and second stimulus payments.

Expert advice from our certified tax consultants

To determine your claim amount, refer to your Notice 1444 which provides the first stimulus check payment, and Notice 1444-B for the second round of stimulus checks. The IRS sends these notices by mail to each recipient within 15 days after stimulus payments are made. This information must be included on the Recovery Rebate Credit worksheet when filing your taxes in 2021.

If you received the full Economic Impact Payment, you won’t be required to complete the Recovery Rebate Credit information on your tax return. More good news – unlike normal tax refunds, these rebate credit checks are NOT subject to “Offset” rules! That is when the IRS offsets (or keeps) some or all of a federal tax benefit to satisfy past due tax debts or other government debts like student loans or child support.

#2. Flexible Spending Accounts (FSAs) can be carried over.

New carryover rules are in effect for FSAs. The old, long-standing rules for unused amounts left in an FSA at year-end dictating that those dollars ‘expire’ after a short grace period (a.k.a. the “Use-It or Lose-It” rules) are now GONE!

What it was for Tax Year 2019

The old rule was that you could only carry over $500 into 2020, which was referred to as the “Use-It or Lose-It” provision. The law gave you a grace period to use up those amounts in 2 and ½ months.

What it is for Tax Year 2020 and 2021

Now, you are permitted to carry over the FULL unused amounts in your health and dependent care FSAs from 2020 into the 2021 year – and 2021 into the 2022 year. The grace period is also now extended under the new rules to a full 12-month period.

Expert advice from our certified tax consultants

This change affords taxpayers with much greater planning opportunities surrounding their pre-tax health expenses. It may be especially useful given that fewer and fewer taxpayers are able to claim their health expenses on their tax returns due to the increased standard deduction. Essentially, this is a way to get a full tax deduction for some of your out-of-pocket medical expenses that span the years!

#3. If you withdrew money early from your retirement income, you have options when filing your 2021 taxes.

In light of the ongoing pandemic, the IRS has eased certain penalties. This includes penalties for tapping your retirement income early for certain qualifying distributions from retirement accounts during 2020. However, this should not $100,000.

What it was for Tax Year 2019

Prior to 2020, taxpayers who took money out of a retirement account before age 59 and ½ would be assessed not only income tax on that distribution, but also a 10% penalty.

What it is for Tax Year 2020

For COVID-related distributions during 2020 (up to $100,000), the IRS is waiving the 10% penalty. It is also allowing taxpayers to elect to spread out the taxable income over 3 years.

Expert advice from our certified tax consultants

When you prepare to file your taxes in 2021, you will receive a Form 1099-R that reports the early distribution. Do NOT just blindly report it as income in full on your 2020 tax return. You have options. Consult your tax professional to determine how much you may want to report in 2020 versus other years in the future.

#4. The debt on a foreclosed home will be taxable at a lower ceiling.

New rules for Cancelled Debt on your Primary Residence! It happens to too many homeowners. They sometimes fall behind on their mortgage payments and get their homes foreclosed. In these instances, insult is added to injury because they receive a Form 1099-C which reports the debt written off by the mortgage company as income.

What it is for Tax Year 2020

As long as the property for which the debt was written off was the taxpayer’s primary residence, the entire 1099-C amount is tax-free up to a total debt amount of $1,000,000.

What it will be for Tax Year 2021

The ceiling has dropped to $750,000. Any forgiven debt on the Form 1099-C that is in excess of this cap will be taxable income.

Expert advice from our certified tax consultants

Do not report the amount reflected on your tax form 1099-C as full taxable income. However, never ignore it! Unfortunately, if the associated debt was in excess of these ceiling limits, you’ll need to speak to a tax professional to explore your options. This could include invoking what is called the “tracing principal” and possibly circumventing the default taxable income rules.

Do not procrastinate on filing your taxes in 2021!

Whether your work situation has changed this past year or not, the world of taxes is constantly evolving. It can be daunting filing your taxes yourself this year. Lodestar’s experienced tax consultants can help. Get in touch today via email at [email protected] or call 704-981-4602.