Lobel Accounting

Interest Received on 2021 Tax Refunds

During 2021, the IRS paid interest to many Americans who had to wait longer than usual for their 2020 federal tax refunds. Unlike the refunds themselves, most IRS interest payments are taxable income. However, many people may not know that they received an interest payment, since the IRS often included the interest with a taxpayer's refund or applied it to tax owed.

If you received a federal tax refund during 2021, you may get Form 1099-INT in the mail from the IRS, showing any taxable interest paid to you. (You will not get this form if the IRS did not pay you any interest.) Store the form with your tax records, so you can accurately report the interest on your 2021 tax return. You can also access records of IRS payments to you by creating an online account through the IRS website.

A tax professional can help you determine whether any payments you received from the IRS are taxable, and how to properly report all of your interest income. Electronically filing an accurate return is the best way to ensure that you receive your 2021 tax refund as quickly as possible.

Tax-related Text Message Scams – Did You Know?

Scammers continue to use IRS impersonation schemes to steal personal information or trick people out of their hard-earned money. In 2021, monitoring agencies saw a dramatic increase in text message tax scams, many of them related to the pandemic.

Several texting scams involve messages that appear to be from the IRS, claiming that the recipient is entitled to a coronavirus “stimulus payment.” The message may have a link to a bogus IRS or other official-looking website, created to harvest banking or other private information. Alternatively, the scammer may request a fee to help collect the supposed stimulus money.

As a rule, the IRS does not send text messages about personal tax matters, except for verification codes for taxpayers logging into their IRS accounts. Do not reply and do not click on any links.

The IRS also does not contact taxpayers via email to request personal or financial information, or leave urgent or threatening phone messages. If you receive a suspicious phone call or message from someone claiming to represent the IRS, hang up or do not reply. Play it safe and contact the IRS directly to inquire about the matter.

Social Security Income May Be Taxable

If you receive Social Security and depending on your total income, you may need to pay federal income tax on Social Security benefits. Potentially taxable payments include monthly retirement and disability benefits, along with survivor benefits.

To determine whether your benefits may be subject to federal tax, first add up your 2021 Social Security payments. Then add half of that amount to your other income for the year, such as wages, tips, pension payments, traditional IRA distributions, interest, dividends and capital gains. The resulting figure is your total income for the purpose of tax on Social Security.

Fifty percent of the benefits may be taxable if you are:

- Filing single, head of household or qualifying widow or widower with $25,000 to $34,000 income.
- Married filing separately and lived apart from your spouse for all of 2020 with $25,000 to $34,000 income.
- Married filing jointly with $32,000 to $44,000 income.

Up to 85% of the benefits may be taxable if you are:

- Filing single, head of household or qualifying widow or widower with more than $34,000 income.
- Married filing jointly with more than $44,000 income.
- Married filing separately and lived apart from your spouse for all of 2021 with more than $34,000 income.
- Married filing separately and lived with your spouse at any time during 2021.

A tax professional can help you properly report your Social Security payments, and figure any tax due on them. Supplemental security income payments are not subject to these rules, and are not taxable.

Eligibility for the 2021 Earned Income Credit (2/2)

The IRS recently highlighted revised eligibility rules for the Earned Income Credit. While many of the changes apply only for tax year 2021, several new rules will hold for future years as well. If you have earned income (such as wages, tips or self-employment income) and low to moderate overall income, you may now qualify for the credit even if you did not in the past.

Here are the rest of the key changes that apply for years 2021 and beyond:

HIGHER LIMIT ON INVESTMENT INCOME: For 2021, workers with investment income of up to $10,000 may qualify for the EITC. This limit is over two and a half times the 2020 threshold of $3,650. For years 2022 and later, the $10,000 limit on investment income will be adjusted upward based on inflation.

NEW RULES FOR MARRIED BUT SEPARATED SPOUSES: If you are separated from your spouse and have a qualifying dependent child, you may now have the option of being treated as unmarried for the purpose of the EITC. This rule enables some workers whose spouses have higher incomes to qualify for the credit. Generally, you must have lived separately from your spouse for at least the last half of the year and/or have a legal separation decree in order to use this option.

WORKERS WHOSE CHILDREN LACK SSNS MAY QUALIFY: Prior to 2021, most workers whose children did not have Social Security Numbers (SSNs) could not claim the EITC. Single and married workers may now apply for the credit as long as they have SSNs, even if their children do not. These workers will generally receive the same credit amount as childless EITC recipients.

You may claim the EITC even if you owe no tax, in which case you will receive the credit as an IRS refund. However, you MUST file a 2021 tax return to receive the credit. If you are unsure how to claim the credit, a tax professional can help you complete a return and file it electronically for faster processing.

Eligibility for the 2021 Earned Income Credit (1/2)

The IRS recently highlighted special 2021 rules for the credit that significantly increases the number of Americans eligible to claim the EITC. If you have earned income (such as wages, tips or self-employment earnings) and low to moderate income overall, this credit could dramatically reduce your tax or entitle you to a tax refund. Here are several key changes to the EITC that apply only for tax year 2021:

HIGHER INCOME LIMITS FOR CHILDLESS WORKERS: Single tax return filers with no children and adjusted gross incomes (AGIs) of up to $21,430 may qualify for the 2021 EITC. For childless married couples filing joint returns, the 2021 AGI limit is $27,380. Both of these AGI thresholds are almost $6,000 higher than the 2020 limits.

HIGHER CREDIT AMOUNTS FOR CHILDLESS WORKERS: The maximum EITC for filers without children is $1,502, nearly three times higher than the 2020 maximum.

EXPANDED AGE RANGE FOR CHILDLESS WORKERS: Ordinarily, workers without dependent children may only claim the EITC if they are of age 25-64. For 2021, all workers age 19 and up (and some 18-year-olds) are eligible for the EITC, with the exception of full-time students under age 24.

INCREASES FOR WORKERS WITH QUALIFYING CHILDREN: The EITC income limits and maximum credit amounts for filers with 1, 2, or 3 or more qualifying children are all slightly higher in 2021 than in 2020. The highest possible 2021 credit is $6,660.

CREDIT MAY BE BASED ON PRE-PANDEMIC INCOME: A special 2021 rule allows filers to use their 2019 earned income to figure their EITC, if their 2021 earned income was lower. This rule helps those who received reduced wages or unemployment benefits due to the pandemic.

You may claim the EITC even if you owe no tax, in which case you will receive the credit as an IRS refund. However, you MUST file a 2021 tax return to receive the credit. If you are unsure how to claim the credit, a tax professional can help you complete a return and file it electronically for faster processing.

EITC and ACTC - Did You Know?

If you're claiming the Earned Income Tax Credit or Additional Child Tax Credit, both of which are refundable credits, your refund will be released by the IRS starting from March 1st, 2022. A refundable credit is one which gives you cash back even if you didn't pay any tax into the system during the year.

You may check the status of your refund at https://www.irs.gov/refunds.

IRS Suspends Sending Notices Due to Return Processing Delays – Did You Know?

As a result of pandemic-related issues, the IRS has a backlog of millions of original and amended 2020 and 2019 tax returns awaiting processing. This situation creates a risk that taxpayers who have met their tax filing and payment obligations could receive automated IRS notices about unfiled returns or balances owed. To prevent confusion and undue taxpayer stress, the IRS has temporarily halted sending certain letters and notices.

- The suspended notices and letters include:
- Notices related to unfiled or delinquent individual tax returns (especially IRS Letters CP80, CP59, CP759, CP516, CP616, CP518 and CP618)
- Tax balance due letters to individual taxpayers (CP501, CP503, CP504)
- Notices to individual taxpayers regarding insufficient tax withholding from paychecks
- Delinquent business tax return notices (CP259, CP959, CP518, CP618)

Although the IRS will not send out these documents while clearing the backlog, penalties and interest charges may still accrue on unpaid tax balances. Therefore, if you have yet to file your 2020 return or owe past tax, you should pay as much of the tax due as possible as soon as you can. A tax professional can help you determine how much to pay, and also help you file any overdue returns.