Simplified Tax Tips
We compiled our most frequently asked tax questions as well as our favorite tax factoids and created a list of information-packed Tax Tips! We update this information annually to include any major legislative change for your individual tax situations.
Tax Tip - Children
Claiming a qualifying child can lead to multiple credits or deductions. After the 2018 Tax Reform changes, the Child Tax Credit increased to $2,000 per child under the age of 17.* The income threshold for this credit was also increased, allowing more households to benefit from this credit. Could be a good surprise! There is also the Earned Income Credit which can be worth over $6,000. A third potential credit is the Child and Dependent Care Credit. Working parents with children under 13 years old may qualify. The IRS allows a credit up to 35% of your daycare costs. If you have one child you can claim up to $3,000 worth of daycare expenses, and $6,000 if you have more than one child in daycare. Contact us to see if you qualify.
*For 2021 only, the Child Tax Credit is increased to $3,600 per child under the age of 6 or $3,000 per child under the age of 18. Also, for the first time ever, the IRS made advance payments of the CTC to families based on their dependents reported in 2019 or 2020. Caution: Taxpayers receiving advance CTC payments that are in excess of the credit actually calculated on the 2021 tax return will have to repay those excess amounts (by increasing the tax liability reported on the 2021 tax return).
Tax Tip - Education Credits
There are some great credits and deductions out there! One option is The American Opportunity Tax Credit (AOTC) which is a credit for 100% of the first $2,000 of qualified education expenses. This credit maxes out at $2,500 and a portion of the credit is refundable, which is very rare in the tax code. It is important to note that if you are claiming the child that is enrolled, you are allowed to take the credit even if you didn’t pay the education expenses. If grandparents helped pay for school or if a loan was used by the student, you are still allowed to take the credit this year. There are very specific rules for what is deductible, how many credit hours you need to qualify, and there are income limitations as well. Make sure you contact one of our tax specialists to find out if you qualify.
Tax Tip - Retirement Saving
If you make a retirement plan contribution you could qualify for a credit of up to $2,000. The credit ranges from 10% up to 50% of your contributions into your retirement plan. If your income is less than approximately $66,000 for a married couple or $33,000 for a single person, this credit might work for you. Even though we are now into 2022, you are still allowed to create and contribute to certain retirement plans which might help you qualify for the credit on your 2021 tax return. This is a rare opportunity where you can consult with your tax professional and make a decision in 2022 that will impact your 2021 tax return.
Tax Tip - Business Changes
If you are a business owner or have rental properties, you are used to hearing about depreciation. As a reminder, there were some changes in 2018 worth repeating. The IRS has expanded what is known as “bonus” depreciation to now cover both new and used business assets and the deduction is now 100% of the purchase price (versus the old rate of 50%). Also, after the 2018 Tax Reform changes, a new 20% qualified business income deduction (QBID) will be available to most business owners. Instead of paying tax on 100% of your business or rental profits, you might only have to pay tax on 80% of your business or rental profits. There are income limitations, but they are pretty generous! You will want to contact a tax professional that fully understands the new tax law to ensure you don’t miss out on these recent changes to the tax code.
Tax Tip - Individuals (2020 CARES Act & reminder of 2018 Tax Reform)
The tax reform changes that passed at the end of 2017 completely changed the tax code and now we have more changes from the CARES Act of 2020.
A reminder of some tax reform changes... The IRS standard deduction is still doubled! If you are a single person, it will be $12,550 (2021). If married filing jointly, $25,100 (2021). In exchange for those higher standard deductions, we lost the per-person exemption. Income tax rates were also reduced. We now have lower 12%, 22%, and 24% brackets (down from 15%, 25%, and 28%). The tax brackets have been widened as well, allowing more of your income to be taxed at lower rates. We also lost some deductions on Schedule A, which is commonly known as “the long form”. The state tax deduction is limited to $10,000 and all miscellaneous itemized deductions have been eliminated. If you previously deducted unreimbursed employee mileage, meals, union dues, etc, please remember these have been eliminated!
A new change for 2021... The IRS is allowing a $600 deduction for cash donations even if you normally use the standard deduction. For folks who lost deductibilty of cash donations during Tax Reform, this allows for $600 of your donations to be deductible again. This new deduction will also reduce both your IRS and Michigan income.
Tax Tip - Individuals (Fun Facts)
Michigan allows a deduction for contributions to the Michigan based education savings plans. So, if you are a Michigan resident and contribute to either the MESP or the MET, you can take a deduction against your Michigan income! This contribution doesn’t need to be for your child. If you make a contribution for your grandchild or niece or nephew or neighbor, you are allowed to claim the deduction on your Michigan income tax return.
Typically, if you sell real estate at a gain, the IRS wants to tax the profit. But if the property was your primary residence for two of the five years before sale, you are able to exclude a portion of the gain from taxation! If you are a single filer, you can exclude up to $250,000 of the gain from taxation. If you are a married joint filer, you can exclude up to $500,000 of the gain from taxation. So typically, there is zero tax when you sell your personal residence.
Tax Tip - COVID Cash Payments
COVID-related shutdowns during 2020 and 2021 led to two common forms of cash payments:
Stimulus Payments, formally called the Economic Impact Payments, were issued in March-April 2020 and again in December 2020-January 2021 and lastly in March 2021. Stimulus payments are tax-free. The stimulus payments are also a pre-paid 2020 or 2021 incentive meaning if you have not received a stimulus payment(s) yet, you may still qualify to have the stimulus payment(s) added to your 2020 or 2021 tax return . The stimulus payments are tax-free regardless of when the payment is received.
Unemployment compensation, with additional funding by the Families First Coronavirus Response Act (FFCRA) and expanded qualifications due to Coronavirus Aid, Relief, and Economic Security (CARES) Act, is taxable compensation to both the IRS and State of Michigan for tax year 2021. A non-taxable exclusion might have applied for tax year 2020 but this was only approved for a singular year, 2020.