Tax Tips for March 2021

by | Mar 26, 2021 | Featured Articles, Tax Tips

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Tax Credits for Electric Vehicles and Plug-in Hybrids

Tax credits are still available for Qualified Plug-in Electric Drive Motor Vehicles, including passenger vehicles and light trucks. The credit applies to vehicles acquired after 12/31/2009 and is limited to $7,500. State and/or local incentives may also apply.

The credit amount is varied and is based on the capacity of the battery used to power the vehicle: $2,500 plus, for a vehicle that draws propulsion energy from a battery with at least 5-kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt-hour of battery capacity above 5-kilowatt hours.

The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009). Phaseouts have been initiated for Tesla, Inc. and General Motors, which means that for tax year 2020, the credit has been reduced to $0. In 2019, the credit was equal to $1,875.

The following requirements must also be met:

  • The vehicle must be new (i.e., not a used vehicle that is “new” to the taxpayer).
  • The vehicle is acquired for use or lease by the taxpayer, and not for resale. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
  • The vehicle is used mostly in the United States.
  • The vehicle must be placed in service by the taxpayer during or after the 2010 calendar year.

The credit is claimed on Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit and reported on the appropriate line of your Form 1040, U.S. Individual Income Tax Return. For vehicles purchased in 2010 or later, this credit can be used toward the alternative minimum tax (AMT).

If the qualifying vehicle is purchased for business use, the credit for the business use of an electric vehicle is reported on Form 3800, General Business Credit.


Special Tax Rules for Children With Investment Income

Special tax rules may apply to some children who received investment income in 2020 or expect to receive it in 2021. The rules may affect the amount of tax and how to report the income. Here are five important points to keep in mind if your child has investment income:

  1. Investment Income. Investment income generally includes interest, dividends, and capital gains. It also includes other unearned income, such as from a trust.
  2. Parent’s Tax Rate. If your child’s total investment income is more than $2,100, then your tax rate may apply to part of that income instead of your child’s tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.
  3. Parent’s Return. You may be able to include your child’s investment income on your tax return if it was more than $1,100 but less than $11,000 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for more information.
  4. Child’s Return. If your child’s investment income was $11,000 or more in 2020, then the child must file their own return. File Form 8615 with the child’s federal tax return.
  5. Net Investment Income Tax. Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use Form 8960, Net Investment Income Tax, to figure this tax.

If you have any questions about your child’s investment income, help is just a phone call away.


Claiming the Credit for Other Dependents

Taxpayers with dependents who don’t qualify for the child tax credit may be able to claim the credit for other dependents. The maximum amount of the credit is $500 for tax year 2020. To take the credit, your dependent must meet certain conditions.

For example, the dependent you are claiming must be age 17 or older and have an individual taxpayer identification number. Other dependents also include dependent parents or other qualifying relatives supported by the taxpayer and dependents living with the taxpayer who aren’t related to the taxpayer.

Here are some additional facts about the credit for other dependents:

  1. The credit begins to phase out when the taxpayer’s income is more than $200,000 ($400,000 for married couples filing a joint tax return).
  2. Taxpayers can claim the credit for other dependents in addition to the child and dependent care credit and the earned income credit.
  3. The dependent must be a U.S. citizen, national or resident alien.
  4. A taxpayer can claim this credit if they claim the person as a dependent on the taxpayer’s return.
  5. The dependent cannot be used to claim the child tax credit or additional child tax credit.

For more information about this and other tax credits that could lower your taxes this year, please contact the office.


Unemployment Benefits Identity Theft Scam Alert

During 2020, millions of taxpayers were impacted by the COVID-19 pandemic through job loss or reduced work hours. Some taxpayers who faced unemployment or reduced work hours applied for and received unemployment compensation from their state. As a reminder, unemployment benefits are taxable income and must be reported on tax returns.

Starting in January 2021, unemployment benefit recipients should have received a Form 1099-G, Certain Government Payments in the mail from the agency paying the benefits. The form shows the amount of unemployment compensation they received during 2020. In some states, taxpayers may be able to receive their Form 1099-G by visiting their state’s unemployment website where they signed up for account benefits to obtain their account information.

Unfortunately, scammers are taking advantage of the pandemic by filing fraudulent claims for unemployment compensation using stolen personal information of individuals who had not filed claims. Due to these fraudulent claims, payments went to the identity thieves. The individuals whose names and personal information were taken did not receive any of the payments.

Taxpayers who receive an incorrect Form 1099-G for unemployment benefits they did not receive should contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits. It is important to note that individuals who a state has identified as ID theft victims should not have been issued Forms 1099-G.

Taxpayers who cannot obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received. A corrected Form 1099-G showing zero unemployment benefits in cases of identity theft will help taxpayers avoid being hit with an unexpected federal tax bill for unreported income.

Taxpayers do not need to file a Form 14039, Identity Theft Affidavit, with the IRS regarding an incorrect Form 1099-G. The identity theft affidavit should be filed, but only if the taxpayer’s e-filed return is rejected because a return using the same Social Security number has already been filed.

Additionally, if taxpayers are concerned that their personal information has been stolen and want to protect their identity when filing their federal tax return, they can request an Identity Protection Pin (IP PIN) from the IRS. An Identity Protection PIN is a six-digit number that prevents someone else from filing a tax return using a taxpayer’s Social Security number. The IP PIN is known only to the taxpayer and the IRS, and this step helps the IRS verify the taxpayer’s identity when they file their electronic or paper tax return.

Don’t hesitate to call if you have any questions about this topic.


There’s Still Time To Make an IRA Contribution for 2020

If you haven’t contributed funds to an Individual Retirement Account (IRA) for tax year 2020, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15, 2021, due date, not including extensions.

Be sure to tell the IRA trustee that the contribution is for 2020. Otherwise, the trustee may report the contribution as being for 2021 when they get your funds.

Generally, you can contribute up to $6,000 of your earnings for tax year 2020 (up to $7,000 if you are age 50 or older). You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.

  • Traditional IRA. You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.
  • Roth IRA. You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Each year, the IRS announces the cost of living adjustments and limitations for retirement savings plans.

Saving for retirement should be part of everyone’s financial plan, and it’s important to review your retirement goals every year to maximize savings. If you need help with your retirement plans, give the office a call.