Recent legislation has eliminated a dreaded Premium Tax Credit subsidy bright-line. In previous-years, if an individual or family received health insurance subsidies by purchasing health insurance through Healthcare.gov, they had to repay ALL of the subsidies if they unexpectedly had income totaling more than 400% of the Federal Poverty Level (about 106K for a family of 4). This strange law often led to crazy and counterintuitive results on a tax return. As an illustration, if that family earned $106,001 of income in a given year, then they triggered that bright-line repayment and might have to repay $4K of subsidy (which is an effective tax rate of 400,000% on that $1 of extra earnings!). For 2021 and 2022, Congress has eliminated this cliff and now any income over this 400% of Federal Poverty Level bright-line will cause that same family to repay their subsidy at a rate of 8.5% (which is an 8.5% tax…much more sensible). Thank you Congress!
A lot of our small-business owners often are eligible for the Earned Income Credit in some of their low-profit years (caused by large equipment purchases or other one-time expenditures of their business). In determining the Earned Income Credit for 2021, taxpayers can use their 2019 earned income if that amount is higher than their 2021 earned income to use in calculating the Earned Income Credit. For self-employed small-business owners there is often a conflict between taxable income and earned income on the tax return (they want a small taxable income BUT a large earned income). In order to get a decent Earned Income Credit in normal years, the small-business owner needs decent taxable income, which causes the small-business owner to pay self-employment tax, which reduces the owner’s overall refund. By taking advantage of this special rule for 2021, the small-business owner can now have low taxable income in 2021 and pay no self-employment tax and still get a large Earned Income Credit, and thereby a larger refund.
If your operations were suspended due to government orders or your sales decreased by more than 20% in a quarter, then you might be able to get a credit for 50% of wages paid to your W-2 employees during that quarter. The calculation is a bit complicated, so reach out to us to find out more. This credit is available for the first 3 quarters of 2021.
A recent law change allows you to contribute to your Traditional IRA despite your age. As long as you have “earned-income” (like self-employment earnings or wage income), then there is no age restriction anymore.
If you have to get your hands on IRA or 401K money before age 59 ½ , then usually you have to pay a 10% penalty. You might be able to avoid this penalty if your withdrawal is to pay for large medical bills, college expenses, the birth or adoption of a child, a first-time home purchase, or is related to a disability. Furthermore, some of these exceptions only apply to IRA withdrawals. So, for example, if you are purchasing your first home, a withdrawal from your 401K to fund it will be subject to a 10% penalty but a withdrawal from an IRA won’t be. Solution: Roll funds from your 401K to your IRA, and then withdrawal the funds from the IRA to use for your house down payment.
You now get a tax credit of 50% of the amount paid for child care for each child under age 13. The max credit is $4K for 1 child or $8K if you have 2 children in day care. If married, both spouses need to have earned income equal-to-or-greater than the amount of child care expenses.
What does this mean for you? If you are married and have 1 child in day care that costs $8K, then you save $4K in tax only if both spouses earn at least $8K. If you only have 1 spouse working, then you get no child care credit. Thus, the first $8K that the normally-non-working-spouse earns might cause tax of $2,700 ($8K times combined FICA, Federal Income, and State Income tax of 33%), but earns the family $4K in credits….so that spouse is being paid $1,300 by the IRS to work!
Obviously, this gives the normally-non-working-spouse an incentive to at least earn the amount of the child care cost!
This credit gets a little confusing when you coordinate it with a pre-tax dependent care plan through work….it might make sense to NOT DEFER money into the pre-tax plan through work since the amount of the credit might be more than the tax saved by the deferral…ask us with questions so that we can guide you on how much to defer into your pre-tax dependent care plan through work.