Eaglestone Alerts

What is the difference between the child tax credit and the child and dependent care tax credit?

These credits are quite different. First, the child tax credit. The purpose of this credit is simply to provide tax relief for parents, working or not, who have qualifying children under the age of 17 (under the age of 18 for 2021). A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.

If you’re eligible, you may be able to take a credit on your federal income tax return of up to $2,000 per child (in 2020, $3,000 ($3,600 if under age 6) in 2021). The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level. A nonrefundable credit of up to $500 may also be available for qualifying dependents other than qualifying children.

The other credit — the child and dependent care tax credit — offers relief to working people who must pay someone to care for their children or other dependents. You may qualify for a tax credit equal to 20 to 35 percent (in 2020, 50 percent in 2021) of expenses incurred when someone cares for your dependent child (under age 13), your disabled spouse, or your disabled dependent so that you (and your spouse, if married) may work or look for work. The work-related expenses you can use when figuring the credit are limited to $3,000 (in 2020, $4,000 in 2021) for one qualifying individual, and $6,000 (in 2020, $8,000 in 2021) for more than one qualifying individual.

For married persons to qualify for the credit, both spouses must work outside the home, or one must work outside the home while the other is a full-time student, is disabled, or is looking for work (provided that the spouse looking for work has earnings during the year). Married couples must also file a joint income tax return. The credit is also available if you’re a single parent or a divorced custodial parent.

If you would like to discuss the subject further, please contact our team of tax specialists at EagleStone.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matter addressed herein. Securities offered through DAI Securities, LLC, Member FINRA/SIPC. Financial Planning, Wealth Management and Tax Services offered through EagleStone Tax & Wealth. DAI Securities and EagleStone are not affiliated entities. Financial Planning, Investment & Wealth Management services provided through EagleStone Wealth Advisors, Inc. Tax & Accounting services provided through EagleStone Tax & Accounting Services.

Can I convert my traditional IRA to a Roth IRA?

Anyone can convert a traditional IRA to a Roth IRA in 2021. There are no income limits, or restrictions based on your tax filing status. You generally have to include the amount you convert in your gross income for the year of conversion, but any nondeductible contributions you’ve made to your traditional IRA won’t be taxed when you convert.

Converting is easy. You simply notify your IRA provider that you want to convert all or part of your existing traditional IRA to a Roth IRA, and they’ll provide you with the necessary paperwork to complete. You can also transfer or roll your assets over to a new IRA provider.

The conversion rules can also be used to allow you to contribute to a Roth IRA in 2021 if you wouldn’t otherwise be able to make regular annual contributions because of the income limits (sometimes called a “back door” Roth IRA). (In 2021, you can’t contribute to a Roth IRA if you earn $208,000 or more and are married filing jointly, or if you’re single and earn $140,000 or more.) You can simply make a nondeductible 2021 contribution to a traditional IRA, and then convert that traditional IRA to a Roth IRA. You can contribute up to $6,000 to a traditional IRA in 2021, $7,000 if you’re 50 or older.

Remember that you can also convert SEP IRAs, and SIMPLE IRAs that are at least two years old, to Roth IRAs. And, if you’re eligible for a distribution from your employer retirement plan [for example, a 401(k) or 403(b) plan], you may be eligible to transfer or roll those distributions over to a Roth IRA as well.

New IRS Guidance on Meals Qualifying for Temporary 100% Expense Deduction

The Internal Revenue Service has released guidance on the new 100% tax deduction for food or beverages bought by businesses from a restaurant (Notice 2021-25; 4/8/21). In an effort to help restaurants struggling to stay afloat in the Covid-19 pandemic, the Consolidated Appropriations Act (CAA) officially authorizes a 100% deduction for food or beverages provided by a restaurant.

Normally, a business can deduct 50% of the cost of its qualified business meals, provided the expenses are properly substantiated. The CAA provision has increased the limit to 100%, allowing for full deductions of food or beverages provided by a restaurant for the next two years, between January 1, 2021 – December 31, 2022.

What Qualifies as a Restaurant? Does it Apply to Dine-In and Take-out?

The notice defines a restaurant as a business that prepares and sells food or beverages to retail customers for immediate consumption, whether or not for on-premise or off-premise consumption.

It is important to note, however, that the IRS says restaurants do not include businesses that primarily sell pre-packaged goods that are not for immediate consumption. This includes the following:

  1. Grocery stores and convenience stores
  2. Specialty food stores
  3. Beer, wine or liquor stores
  4. Drug stores
  5. Newsstands
  6. Vending machines or kiosks
Also prohibited is an eating facility located on the employer’s business premises and used in furnishing meals excluded from an employee’s gross income under IRC Section 119. Additionally, an employer can’t treat certain employer-operated eating facilities as a restaurant, even if a third party under contract operates the facility with the employer.

As always, our team of tax specialists are available to provide additional information and assistance as you consider how this change may impact your business. We look forward to the continued opportunity to work together in the fluid world of tax regulation.

Enhanced Child Tax Credit for 2021

If you have qualifying children under the age of 18, you may be able to claim a child tax credit. (You may also be able to claim a partial credit for certain other dependents who are not qualifying children.) The American Rescue Plan Act of 2021 makes substantial, temporary improvements to the child tax credit for 2021, which may increase the amount you might receive.

Ages of qualifying children

The legislation makes 17-year-olds eligible as qualifying children in 2021. Thus, children age 17 and younger are eligible as qualifying children in 2021.

Increase in credit amount

For 2021, the child tax credit amount increases from $2,000 to $3,000 per qualifying child ($3,600 per qualifying child under age 6). The partial credit for other dependents who are not qualifying children remains at $500 per dependent.

Phaseout of credit

The combined child tax credit (the sum of your child tax credits and credits for other dependents) is subject to phaseout based on modified adjusted gross income (MAGI). Special rules start phasing out the increased portion of the child tax credit in 2021 at much lower thresholds than under pre-existing rules. The credit, as reduced under the special rules for 2021, is then subject to phaseout under the pre-existing phaseout rules.

The following table summarizes the effect of the phaseouts on the child tax credit in 2021, based on MAGI.

Single/Married filing separately Married filing jointly Head of household Combined credit
Up to $75,000 Up to $150,000 Up to $112,500 No reduction in credit
$75,001 to $200,000 $150,001 to $400,000 $112,501 to $200,000 Credit can be reduced to $2,000 per qualifying child, $500 per other dependent
More than $200,000 More than $400,000 More than $200,000 Credit can be reduced to $0

Refundable credit

The aggregate amount of nonrefundable credits allowed is limited to tax liability. With refundable credits, a taxpayer may receive a refund at tax time if they exceed tax liability.

For most taxpayers, the child tax credit is fully refundable for 2021. To qualify for a full refund, the taxpayer (or either spouse for joint returns) must generally reside in the United States for more than half of the taxable year. Otherwise, under the pre-existing rules, a partial refund of up to $1,400 per qualifying child may be available. The credit for other dependents is not refundable.

Advance payments in 2021 to eligible taxpayers

Eligible taxpayers may receive periodic advance payments for up to half of the refundable child tax credit during 2021, generally based on 2020 tax returns. The U.S. Treasury will make the payments between July and December 2021. For example, monthly payments could be up to $250 per qualifying child ($300 per qualifying child under age 6).

Call our team of tax professionals for additional information and to discuss how this tax credit may benefit you.

Enhanced Child and Dependent Care Credit for 2021 Tax Year

There are improvements made by the American Rescue Plan Act (ARPA) to the child and dependent care tax credit for the 2021 tax year. The credit covers eligible expenses that you pay to care for one or more qualifying individuals so you can work, or if you’re married, so both you and your spouse can work.

What Expenses Qualify?

For a care expense to qualify for the credit, the expense must be “employment-related,” i.e., it must enable you and your spouse to work (or look for work), and it must be for the care of your child, stepchild, or foster child, or your brother or sister or step-sibling (or a descendant of any of these), who’s under 13, lives in your home for over half the year, and doesn’t provide over half of his or her own support for the year. The expense can also be for the care of your spouse or dependent of any age who’s physically or mentally incapable of self-care and lives with you for over half the year.

The typical expenses that qualify for the credit are payments to a day care center, nanny, or nursery school.

The cost of household services, e.g., domestic help, qualify as long as the cost at least in part goes towards the care of the individual. Expenses can include cooking, light housework related to the qualifying individual’s care, and the care itself.

Expenses provided for care outside the home also qualify. This applies if the person regularly spends at least eight hours each day in your home. If the qualifying person receives care in a dependent-care center, the center must comply with all relevant state and local laws. A dependent-care center is one that cares for more than six people for a fee.

What Doesn’t Qualify?

  • Transportation costs to/from a childcare facility
  • Overnight camp expenses
  • Expenses for education of a child in kindergarten or higher

The cost of before- and after-school programs may qualify as care expenses if the program is for the care of the child. Education costs below kindergarten qualify if you can’t separate those costs from the cost of care – this includes nursery school.

How to Claim the Credit

To claim the credit, married couples must file a joint return. For purposes of this rule, a valid same-sex marriage that’s authorized under state or foreign law is recognized, but a registered domestic partnership or a civil union isn’t.

The 2021 credit is refundable as long as either you or your spouse has a principal place of abode in the U.S. for more than one-half of the tax year.

Further, you must provide the caregiver’s name, address, and social security number (or tax ID number if it’s a day care center or nursery school). A day care center must be in compliance with state and local regulations.

You also must include on the return the social security number of the children who receive the care.

Limits on Calculating the Credit

When calculating the credit, several limits apply:

First, qualifying expenses are limited to the income you or your spouse earns from work, self-employment, or certain disability and retirement benefits—using the figure for whichever of you earns less. Under this limitation, if one of you has no earned income, you won’t be entitled to any credit. However, under certain conditions, when one spouse has no actual earned income and that spouse is a full-time student or disabled, the spouse is considered to have monthly income of $250 (if the couple has one qualifying individual) or $500 (two or more qualifying individuals).

For 2021, the first $8,000 (increased from $3000) if you have one qualifying individual, or $16,000 (up from $6000) if you have two or more qualifying individuals, of care expenses generally qualifies for the credit. However, if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the qualifying expense limits ($8,000 or $16,000) are reduced by the excludable amounts you receive.

If you have questions about how this credit might benefit you and your family, or you would like to discuss the subject further, please contact our team of tax specialists at EagleStone.

MHEC Student Loan Debt Relief Tax Credit Program for 2021 – Apply by September 15th

We are aware that student loan debt has become a growing concern among college graduates and wanted to remind you of a tax credit that you may be able to take advantage of.

The Maryland Higher Education Commission (MHEC) is continuing their Student Loan Debt Relief Tax Credit for 2021. This tax credit is given to help students offset some of their outstanding loan balances and has helped many of them since the program first began in 2017. If you think you may qualify, you will want to move quickly as the window for submissions is closing as of September 15, 2021.

Here are the details

There are a few qualifications that must be met in order to be eligible for the 2021 tax credit. The student must:

1. Have incurred at least $20,000 in undergraduate and/or graduate student loan debt;
2. Have the debt be in their (the Taxpayer’s) name;
3. Have at least $5,000 in outstanding student loan debt upon applying for the tax credit;
4. Claim Maryland residency for the 2021 tax year; and
5. File 2021 Maryland State Income Taxes.

If the student meets these qualifications they can submit an online application by September 15, 2021. The notification of tax awards are sent in mid-December. Along with the application the student must submit student loan information which includes Maryland Income Tax Forms, college transcripts, and lender documents.

MHEC has a method that they use to prioritize tax credit recipients and amounts based on qualified taxpayers who:

1. Have higher debt burden to income ratios;
2. Graduated from an institution of higher education located in Maryland;
3. Did not receive a tax credit in a prior year; and
4. Were eligible for in-state tuition.

Students who did not attend an in-state institution are still eligible for the tax credit, but may not receive as large a credit as those who attend an in-state (MD) school.

When the student is awarded with the tax credit (up to $5,000) they must use the credit to pay their college loan debt within two years. They also must show proof of payment to the lender to MHEC. Failure to pay within the two years will result in recapture of credit back to the State. Recipients of the Student Loan Debt Relief Tax Credit have two options for debt repayment:

1. Make a one-time payment for the amount of tax credit to lender; or
2. Make monthly payments to the lender until the amount of the tax credit is paid.

This tax credit could be of great benefit to Maryland taxpayers with student loans. The application will close September 15, 2021.

As always, we stand ready to answer any questions that you have about this program or to assist you with submitting an application. Please contact our office at anytime.

footerlogo

Securities offered through DAI Securities, LLC. Member FINRA/SIPC. Advisory Services offered through EagleStone Tax & Wealth Advisors. EagleStone Tax & Wealth Advisors is not affiliated with DAI Securities. Financial planning, investment and wealth management services provided through EagleStone Wealth Advisors, Inc. Tax and accounting services provided through EagleStone Tax & Accounting Services.

Download our Form CRS (Client Relationship Summary) by clicking here.

Download our ADV brochure by clicking here.

Download our ADV Part 2A brochure by clicking here.

Click here to learn more about our Information Security Program.

Investment products & services are only available to residents of CO, DC, FL, KS, KY, MA, MD, NC, NY, PA, SC, VA & WA.

Licensed to sell insurance and variable annuities in the following States: DC, DE, FL, MD, ME, MI, NC, NJ, NY, PA, SC, & VA.