How COVID-19 Relief Will Affect Your Taxes. Yahoo Finance
February 15, 2022·5 min read
Read in website: How COVID-19 Relief Will Affect Your Taxes
It’s now closer to March than January, which means you still have time to get your taxes done early. It’s time to get cracking, though — especially if you’re not sure how all the pandemic relief from 2021 will affect your returns.
Taxes in 2022: Find Out Everything You Need To Know About Filing, Refunds and More
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A GOBankingRates study found that nearly one in three people who qualified for the Child Tax Credit don’t know what impact it will have on their taxes, but that’s not the only unique consideration for the strange tax year of 2021.
So, we asked the experts to shed light on what last year’s final flurry of COVID relief will mean for when you decide it’s time to do your taxes. Check it out, and head to our Tax Resource Center for more.
Economic Impact Payments
The $1,400 direct stimulus payments that most Americans received in 2021 will have no bearing on their taxes. “Economic Impact Payments are not included in income and do not increase an individual’s tax liability,” said Shannon Christensen, an attorney, author and editor for Thomson Reuters Tax and Accounting.
If you earned more money in 2021 than you expected, you don’t have to worry about having received extra stimulus either.
Related: 5 Things To Know About How the Stimulus Checks Can Affect Your Taxes
“If a taxpayer was paid too much of an Economic Impact Payment compared to what they were entitled to receive, they do not have to pay the amount back,” Christensen said.
That goes for nearly all situations. “There are no provisions in the law that allow the government to require people to pay back stimulus payments — except in cases of fraud,” said Kari Brummond, a tax preparer with TaxCure. Brummond explainws that she had clients who received EIPs for spouses who had since passed away based on income taxes from the year before — and even they got to keep it all.
Child Tax Credit
The second-biggest piece of the 2021 COVID relief package was the expanded Child Tax Credit — and if you qualified for it, this will affect your taxes.
“For those with children, your tax refund might be smaller or larger than usual because of 2021’s enhanced Child Tax Credit,” said Armine Alajian, CPA, founder of the Alajian Group. “The CTC increased to as much as $3,000 to $3,600 per child, and some parents received an advance on this credit in the form of monthly payments during 2021. Parents can claim the remainder of this credit when they file their return while those who opted out of the installment plan can claim it all at once.”
Explore: IRS Warns of Potentially Outdated Information on Child Tax Credit Portal, Mailed CTC Letters
Unlike the Economic Impact Payments, however, people who earned more money last year than they did the year before might be on the hook for any overpayments they received.
“One of the most important things to remember is the CTC was based on 2020 income information,” said Alajian. “That means, if your income was higher in 2021, you may have to pay back some of the advanced credit you received last year.”
Earned Income Tax Credit
2021 saw a big expansion of the Earned Income Tax Credit (EITC), as well.
“The American Rescue Plan Act increased the eligibility of the credit by broadening the income range to include more individuals,” said Christensen. “It also increased the credit for individuals with no qualifying children.”
See: Child and Dependent Care Credit Can Add Up to $8,000 — Here’s How To Claim the Money on Your Taxes
The IRS is letting taxpayers pick the year that gives them the biggest credit.
“Taxpayers may use the greater of their 2019 or 2021 earned income in calculating the credit for 2021,” said Christensen. “Additionally, taxpayers that have qualifying children — after 2020 — but can’t meet the identification requirements for the qualifying children can nevertheless claim the credit for themselves.”
If you received unemployment payments in 2021, keep in mind that the pandemic protections you came to enjoy are a thing of the past.
“In 2020, the American Rescue Plan waived federal taxes on up to $10,200 of unemployment benefits, but this was not extended to 2021,” said Alajian. “All taxpayers who received unemployment last year will have to pay taxes on the benefits, as with previous years.”
If you continued paying your student loans despite the federal freeze, 100% of your payments went to the principal. Not paying interest is a good thing, but just keep that fact in mind come tax time.
“The student loan pause not only pushed back payments for borrowers, but it paused interest,” said Alajian. “This means that most of those who typically write off their student loan interest can’t do so this year, resulting in a refund that’s potentially a couple hundred dollars less.”
Read More: 10 Ways To Pay Off Your Student Loans in One Year
The good news is, if you received student loan forgiveness, the forgiven portion doesn’t count as taxable income this year, as it normally would.
“As part of the American Rescue Plan Act, beginning in 2021 and continuing through 2025, the forgiveness of many types of student loans for post-high school education won’t result in income inclusion for the forgiven amounts,” said Christensen. “Normally, the discharge of indebtedness results in a requirement to include the discharged amount in income.”
Recovery Rebate Credit
Lastly, 2021’s pandemic relief will affect you if you didn’t get all the payments you were entitled to receive.
“If a taxpayer did not receive the full amount of their third-round stimulus payment, they can claim it as a refundable credit, known as the Recovery Rebate Credit, when they file their 2021 tax return,” said Professor Sakinah Tillman, a tax expert and assistant professor at the University of the District of Columbia David A. Clarke School of Law.
“A refundable credit reduces a taxpayer’s total tax liability to the extent that a taxpayer can receive a refundable credit that is more than their total tax liability and receive a refund,” Tillman said.
This article originally appeared on GOBankingRates.com: How COVID-19 Relief Will Affect Your Taxes