Teachers and other educators should remember that they can deduct certain unreimbursed expenses such as classroom supplies, training, and travel – even when schools switched to hybrid or remote learning models during the pandemic last spring. Deducting these expenses helps reduce the amount of tax owed when filing a tax return.

To qualify for the deduction, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide. They must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

Teachers and other educators can also take advantage of various education tax benefits for ongoing educational pursuits such as the Lifetime Learning Credit or, in some instances, depending on their circumstances, the American Opportunity Tax Credit.

How the Educator Expense Deduction Works

Educators can deduct up to $250 of unreimbursed business expenses. If both spouses are eligible educators and file a joint return, they may deduct up to $500, but not more than $250 each. The educator expense deduction is available even if an educator doesn’t itemize their deductions. To take advantage of this deduction, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide for at least 900 hours during a school year in a school that provides elementary or secondary education as determined under state law.

Expenses an educator can deduct include:

• Professional development course fees
• Books
• Supplies
• Computer equipment, including related software and services
• Other equipment and materials used in the classroom
• Athletic supplies for courses in health or physical education.

Keep Good Records

Educators should keep detailed records of qualifying expenses noting the date, amount, and purpose of each purchase. This helps prevent a missed deduction at tax time. Taxpayers should also keep a copy of their tax return for at least three years. Copies of tax returns may be needed for many reasons. A tax transcript summarizes return information and includes adjusted gross income and available free of charge from the IRS.

Questions?

Don’t hesitate to call if you have any questions about tax deduction available to educators, including teachers, administrators, and aides.

If you’re looking to sell your home this year, then it may be time to take a closer look at the exclusion rules and cost basis of your home to reduce your taxable gain on the sale of a home.

The IRS home sale exclusion rule allows an exclusion of gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime (but not more frequently than every 24 months), as long as you meet certain ownership and use tests.

During the 5-year period ending on the date of the sale, you must have:

• Owned the house for at least two years – Ownership Test
• Lived in the house as your main home for at least two years – Use Test
• During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

The Ownership and Use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a 5-year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a 1-year sabbatical, do not.

If you own more than one home, you can exclude the gain only on your primary home. The IRS uses several factors to determine which home is a principal residence: the place of employment, location of family members’ main home, mailing address on bills, correspondence, tax returns, driver’s license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.

As mentioned earlier, the exclusion can be used repeatedly every time you reestablish your primary residence. When you change homes, please call the office with your new address to ensure the IRS has your current address on file.

Only taxable gain on the sale of your home needs to be reported on your taxes. Further, you cannot deduct the loss on the sale of your main home. Please call for additional details.

Improvements Increase the Cost Basis

Additionally, consider all improvements made to the home over the years when selling your home. Improvements will increase the cost basis of the home, thereby reducing the capital gain.

Additions and other improvements that have a useful life of more than one year can also be added to the cost basis of your home.

Examples of improvements include the following: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air, flooring, insulation, or security system.

Jack and Mary Kelly purchased their primary residence in 2012 for $200,000. They paved the unpaved driveway, added a swimming pool, and made several other home improvements adding up to a total of $75,000. The adjusted cost basis of the house is now $275,000. The house is then sold in 2021 for $550,000. It costs them $40,000 in commissions, advertising, and legal fees to sell the house.

These selling expenses are subtracted from the sales price to determine the amount realized. The amount realized in this example is $510,000. That amount is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain, in this case, is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and, therefore, no reporting of the sale on their 2021 personal tax return.

The Residential Energy Efficient Property Credit

This tax credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment, wind turbines, and solar roofing tiles, and solar roofing shingles that serve as solar electric collectors, while also performing the function of traditional roofing. In the case of property placed in service after December 31, 2019, and before January 1, 2023, the credit is 26 percent. For property placed in service after December 31, 2022, and before January 1, 2024, the credit is 22 percent. There is no cap on the amount of credit available, except for fuel cell property.

Generally, you may include labor costs when figuring the credit, and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; fuel cell property qualifies only when installed on or in connection with your main home located in the United States.

Not all energy-efficient improvements qualify, so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging. Please contact the office for more information about residential energy tax credits.

Partial Use of the Exclusion Rules

Even if you do not meet the ownership and use tests, you may be allowed to exclude a portion of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home. If one of these situations applies to you, please call us for additional details.

Recordkeeping

Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for three years after the filing due date. However, you should keep documents proving your home’s cost basis for as long as you own your house.

The records you should keep include:

• Proof of the home’s purchase price and purchase expenses
• Receipts and other records for all improvements, additions, and other items that affect the home’s adjusted cost basis
• Any worksheets or forms you filed to postpone the gain from the sale of a previous home before May 7, 1997

Questions?

Tax considerations surrounding the sale of a home can be confusing. If you have any questions on taxes related to the sale of your home, please call.

Thanks to the advance payments of the Child Tax Credit, approximately 60 million children received $15 billion in July, according to the Department of Treasury and the IRS. While many of these families will benefit from the extra money deposited into their bank accounts, some families may want to opt-out and instead take the credit when they file their tax return next spring.

Why Consider Opting Out?

There are several reasons a taxpayer may want to opt-out or unenroll. For example, if the amount of tax owed when filing a 2021 tax return will be greater than the expected refund.

Because the payments you receive are an advance of the Child Tax Credit that a taxpayer would normally qualify for when filing their taxes, every dollar received in advance will reduce the amount of Child Tax Credit a taxpayer is able to claim on their 2021 tax return. By accepting advance child tax credit payments, the refund amount may be reduced, or the amount of tax owed may increase. By unenrolling and claiming the entire credit when filing a 2021 tax return, a taxpayer may avoid owing tax to the IRS – thereby avoiding a “tax surprise.”

If your tax situation has changed and you receive more money than you are entitled to, you will generally need to pay any excess back to the IRS. However, if your income is below certain threshold amounts, then IRS repayment protection applies. These amounts are:

• $60,000 if you are married and filing a joint return or if filing as a qualifying widow or widower;
• $50,000 if you are filing as head of household; and
• $40,000 if you are a single filer or are married and filing a separate return.

Some families may prefer to receive a lump sum payment (i.e., tax refund) instead of smaller payments. This is especially true if families use the refund to make a large purchase such as a car or home appliance.

Complex family situations such as divorced or separated parents who share custody and claim dependents on their tax returns in alternate years, for instance, also make unenrolling an attractive option – simply to avoid an even more complicated tax filing situation.

Self-employed individuals, whose income fluctuates, may also want to opt-out. Typically, estimated taxes are paid based on a prior year’s income and may differ from the current year’s income. Because the advance payment of the Child Tax Credit offsets the amount of tax owed, it may inadvertently result in an estimated tax penalty.

Higher net worth families with complicated tax returns that include not only wages but income from capital gains or rental properties are another group that might consider unenrolling. Quite often, they have tax planning strategies to reduce their tax liability, and any extra income could complicate their tax situation.

How to Unenroll

The Child Tax Credit Update Portal (CTC UP) allows taxpayers to unenroll from receiving Advance Child Tax Credit payments. To stop advance payments, a taxpayer must unenroll three days before the first Thursday of next month by 11:59 p.m. Eastern Time. There is no need to unenroll each month. If that month’s deadline is missed, the next scheduled advance payment will be sent out. The unenrollment process may take several days, and taxpayers should check back after unenrolling to make sure the request was processed successfully.

Here to Help

Taxes are complicated, and pandemic-related tax legislation has made it even more so. If you need help figuring out whether your tax situation merits opting out of the monthly advanced payments of the Child Tax Credit, don’t hesitate to call.

Key tax provisions in the American Rescue Plan Act of 2021 could affect your tax situation. Here’s what you need to know:

Child and Dependent Care Credit Increased for 2021 Only

The new tax law affected taxpayers in several ways. First, it increased the dollar amount of the credit and the amount of eligible expenses for child and dependent care. It also modified the phase-out amount for the credit to allow higher earners to take advantage of the credit. Finally, the new law made the child and dependent care credit fully refundable.

For 2021, the top credit percentage of qualifying expenses increased from 35% to 50%. In addition, eligible families can claim qualifying child and dependent care expenses of up to $8,000 for one qualifying individual (up from $3,000 in prior years) or $16,000 for two or more qualifying individuals (up from $6,000 before 2021). This means that the maximum credit in 2021 of 50% for one dependent’s qualifying expenses is $4,000, or $8,000 for two or more dependents.

When figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses. 

As before, the more a taxpayer earns, the lower the credit percentage. Under the new law, however, more people will qualify for the new maximum 50% credit rate because the adjusted gross income (AGI) level at which the credit percentage is reduced is raised substantially from $15,000 to $125,000.

For adjusted gross incomes above $125,000, the 50% credit percentage is reduced as income rises and plateaus at a 20 percent rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20 percent until reaching $400,000 and is then phased out above that level. It is completely unavailable for any taxpayer with AGI exceeding $438,000.

Also of significance is that in 2021, for the first time, the credit is fully refundable. As such, an eligible family can get it, even if they owe no federal income tax.

Workers Can Set Aside More in a Dependent Care FSA

For 2021, the maximum amount of tax-free employer-provided dependent care benefits increased from $5,000 to $10,500. An employee can set aside $10,500 in a dependent care FSA if their employer has one instead of the normal $5,000.

Workers can only do that if their employer adopts this change. Interested employees should contact their employer for details.

Childless EITC Expanded for 2021

For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC), a fully refundable tax benefit that helps many low- and moderate-income workers and working families. That’s because the maximum credit is nearly tripled for these taxpayers and is, for the first time, made available to both younger workers and senior citizens.

In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don’t qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.

Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.

Changes Expanding EITC for 2021 and Future Years

Changes expanding the EITC for 2021 and future years include:

Singles and Couples – who have Social Security numbers can claim the credit, even if their children don’t have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn’t qualify for the credit. 

Workers and Working Families – who also have investment income can get the credit. The limit on investment income is increased to $10,000 starting in 2021. After 2021, the $10,000 limit is indexed for inflation. The current limit is $3,650.

Married but Separated Spouses – can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for at least six months out of the year, and must have a qualifying child living with them for more than half the year.

Expanded Child Tax Credit for 2021 Only

The new law increases the amount of the Child Tax Credit, makes it available for 17-year-old dependents, makes it fully refundable, and makes it possible for families to receive up to half of it, in advance, during the last half of 2021. Moreover, families can get the credit, even if they have little or no income from a job, business, or another source.

Prior to the taxable year 2021, the credit is worth up to $2,000 per eligible child. The new law increases it to as much as $3,000 per child for dependents ages 6 through 17 and $3,600 for dependents ages five and under.

The maximum credit is available to taxpayers with a modified AGI of:

• $75,000 or less for singles,
• $112,500 or less for heads of household and
• $150,000 or less for married couples filing a joint return and qualified widows and widowers.

Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every $1,000 in modified AGI. Furthermore, the credit is fully refundable for 2021. Before this year, the refundable portion was limited to $1,400 per child.

Advance Child Tax Credit Payments

From July through December 2021, up to half the credit will be advanced to eligible families by the Department of Treasury and the IRS. These advance payments will be estimated from their 2020 return, or if not available, their 2019 return.

For that reason, the IRS urges families to file their 2020 returns as soon as possible – including many low-and moderate-income families who don’t normally file returns. Often, those families will qualify for an Economic Impact Payment or tax benefits, such as the EITC. This year, taxpayers have until May 17, 2021, to file a return.

To speed delivery of any refund, be sure to file electronically and choose direct deposit. Doing so will also ensure quick delivery of the Advance Child Tax Credit payments to eligible taxpayers later this year.

In the next few weeks, eligible families can choose to decline to receive the advance payments (more information about this, below). Likewise, families will also be able to notify Treasury and IRS of changes in their income, filing status, or the number of qualifying children using the IRS Child Tax Credit Update Portal.

Help is Just a Phone Call Away

For the most up-to-date information on these and other changes affecting your tax situation in 2021, don’t hesitate to contact the office. With taxes becoming more complicated every year, it’s never too early to consult a tax and accounting professional for assistance.