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Most changes apply to the general public, but some have special implications for the military community. Even within the military community, the changes will not have the same impact on everyone. So it is important to know your circumstances and adapt to the reforms and changes in a way that reflects your finances and lifestyle.
If you have questions about recent changes or any other tax-related issues, MilTax consultants can provide answers.
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Provisions in the Coronavirus Aid, Relief and Economic Security Act may affect your 2021 federal income tax return in the following ways:
- Expanded advance child tax credit: As part of the American Rescue Plan to help Americans recover financially from the pandemic, the child tax credit for 2021 was expanded to $3,600 for children under the age of 6 and $3,000 for children 6-17 years old. Eligible families automatically received monthly payments from July 15 through December 2021, totaling half of the credit. Families may claim the other half of the credit when filing their 2021 tax return. You can sign into your account to verify the amount received or refer to letter 6419. Make sure you receive your full Child Care Tax Credit. Visit ChildTaxCredit.gov, check your eligibility and then file your tax return.
- Retirement account withdrawals: The 10% tax penalty for an early withdrawal from a retirement account was suspended through Dec. 31, 2020, for those who suffered financial hardship due to COVID-19. Review the IRS guidelines for coronavirus-related relief for retirement plans and IRAs and check with a tax counselor if you have questions about your 2021 taxes.
- Economic Impact Payments: You should have received the first, second and third Economic Impact Payments in 2020 and 2021. If you did not, or if you received less than the amount for which you were eligible, you may claim the Recovery Rebate Credit on your federal income tax return.
- Charitable contributions: To encourage giving in 2021, the CARES Act allows taxpayers who claim the standard deduction when filing taxes to claim a portion of their deductions made to eligible charities in 2021. Single taxpayers can deduct up to $300 and married couples filing jointly can deduct up to $600 in cash contributions.
- Unemployment benefits: If you are a military spouse who received unemployment benefits in 2021, you will receive a form 1099-G, Certain Government Payments, that states your unemployment income and any income tax withheld. Be sure to report this information on your tax return.
- Social Security payroll tax deferral: Social Security taxes were deferred for service members from mid-September through the end of December 2020. Most members had the deferred Social Security taxes automatically taken from their pay from Jan. 1-Dec. 31, 2021. If you didn’t, learn what to expect in 2022 from the Defense Finance and Accounting Service.
Key tax reforms
Picture your financial and personal events over the last year. Perhaps you are looking forward to having your first child. Maybe the ink just dried on the paperwork for your new home. Take a look at these key reforms and see if they will affect your spending and family circumstances:
- Standard deduction: For tax year 2021, the standard deduction is $12,550 for singles or those who are married but filing separately, $25,100 for those who are married and filing jointly and $18,800 for those who file as the head of household.
- Personal exemption deduction: Beginning in 2018, you can’t claim a personal exemption deduction for yourself, your spouse or your dependents. This may impact decisions on the itemized deductions and dependents you claim on your tax return.
- Itemized deductions: Beginning in 2018, the following changes were made to itemized deductions that taxpayers can claim on Schedule A:
- Your itemized deductions are no longer limited if your adjusted gross income is over a certain amount.
- You can deduct the part of your medical and dental expenses that is more than 7.5% of your adjusted gross income.
- Your deduction of state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if married and filing separately). As a military member, your state of legal residence and the state in which you own a home will determine how much this change impacts you.
- Under the new rules, unreimbursed business expenses, including auto, travel, meals, entertainment and home office expenses, are no longer deductions.
- For debt incurred after Dec. 15, 2017, the deduction for home mortgage interest is limited to interest on up to $750,000 ($375,000 if you are a married taxpayer filing a separate return) of home-acquisition debt. This new limit doesn’t apply if you had a binding contract to close on a home after Dec. 15, 2017, and closed on or before April 1, 2018. The prior limit would apply in that case.
- Beginning in 2018, you cannot deduct interest on a home equity loan or line of credit unless it’s for buying, building or making substantial improvements to your home.
- The limit on charitable contributions of cash is typically 20% to 60% of your adjusted gross income. However, for tax years 2020 and 2021, the limit is 100% of your adjusted gross income.
- Child tax credit: For tax year 2021, the Child Tax Credit increased from $2,000 per qualifying child to:
- $3,600 for children ages 5 and under at the end of 2021; and
- $3,000 for children ages 6 through 17 at the end of 2021
- The Child Tax Credit phases out in two different steps based on your modified adjusted gross income in 2021.
- The first phaseout can reduce the Child Tax Credit to $2,000 per child. That is, the first phaseout step can reduce only the $1,600 increase for qualifying children ages 5 and under, and the $1,000 increase for qualifying children ages 6 through 17, at the end of 2021.
- The second phaseout can reduce the remaining Child Tax Credit below $2,000 per child.
- Credit for other dependents: A nonrefundable credit of up to $500 is available for each of your dependents, such as an adult child with a disability or an elderly parent who does not qualify for the child tax credit. In addition, the maximum income threshold at which the credit begins to phase out has increased to $200,000 ($400,000 if married and filing jointly).
- Education: As a result of the new tax codes, you can use funds from your 529 education savings plan to pay for private K-12 educational expenses at secondary public, private or religious schools with a limit of $10,000 per student per year.
- Reserve service members: Reserve service members are able to deduct unreimbursed travel expenses to attend drill duty only if it takes place more than 100 miles away from home.
- Moving expenses: Members of the armed forces can still deduct moving expenses as long as the move is part of an authorized permanent change of station or PCS. If you’re voluntarily moving, you will join most other taxpayers in no longer being able to deduct moving expenses from your taxes.
- Deployments to the Sinai Peninsula: If you previously served in the newly designated combat zone, you may qualify for retroactive tax benefits. If so, you’ll need to submit an amended tax return, or Form 1040X, for the year in which you were there, dating to 2015. You generally have three years from the date you filed your previous tax return to claim the refund.
- Alimony or maintenance payments: If you make alimony or maintenance payments, you will no longer be able to deduct them from your taxable income, and the recipient will no longer have to claim the payments as income. This went into effect for any divorce or separation agreement signed or modified after Dec. 31, 2018, as long as the modification is not one of the one described below:
- Changes the terms of the alimony or separate maintenance payments; and
- States that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
- Estate tax exemption: The estate tax exemption for 2021 is $11.7 million, so an estate valued at less than the new threshold will not be taxed when the owner dies.
- Investment fees: You can no longer deduct investment fees from taxes. If a major part of your financial strategy includes investments, and you have substantial investor fees, you will be paying more in taxes.
- Penalty for not maintaining minimum essential health coverage: Beginning in 2019, the penalty amount was reduced to zero.
How to prepare for the upcoming tax season
Protect your finances by withholding enough to avoid paying additional taxes when you file. Ask yourself the following questions to see if you need to update your withholding selections:
- Are you a two-income family?
- Do you work two or more jobs at the same time or work only part of the year?
- Do you claim credits such as the child tax credit?
- Do you claim older dependents, including children 17 and older?
- Did you itemize deductions on your 2020 taxes?
- Do you have a high income and historically complex tax returns?
- Did you have a large tax refund or large tax bill in 2020?
If you answered yes to any of these questions, consider updating your Form W-4, Employee’s Withholding Allowance Certificate, with your employer as soon as possible.
- Military OneSource MilTax tax preparation and e-filing software can make the tax season easier for you. Call 800-342-9647 or start a live chat anytime to schedule an appointment with a MilTax consultant or accredited financial counselor. OCONUS/International? View calling options. All MilTax services are 100% free to eligible service members and their families.
- You have accredited personal financial managers and counselors at your fingertips. Set up a free appointment at your nearest Military and Family Support Center to learn more about how the tax law changes impact your financial goals.
- The IRS provides a useful Tax Withholding Estimator to help you determine whether you or your spouse need to make adjustments.
- The IRS often changes and updates tax forms. Always check the IRS website for the most up-to-date tax forms before planning or preparing your taxes.
- Tax preparation for the military community is available through the Volunteer Income Tax Assistance program. Locate the VITA site at an installation near you. VITA support is not available in every state or location.