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Taxes Today: Earned Income Tax Credit and Other Hot TopicsBy: National Association of Tax Professionals
December 3, 2021

Drake Software and NATP met recently to discuss changes to the earned income credit (EIC) for 2021 tax returns, how the EIC works for taxpayers without children, preparer penalties and due diligence, and other hot topics such as the recently passed Infrastructure Investment and Jobs Act, and designation renewal.

This unscripted conversation was recorded for you to view, for free! To watch the full discussion, go to natptax.com/taxestoday.

Embedded content: https://www.youtube.com/watch?v=XMIzoj7QGhE

Panelists include Drake Software‘s VP of strategic development, John Sapp, CPA, and tax analyst Bob Nolan, EA, CPA, along with NATP tax research specialist Sheri Fronsee, CPA, and NATP member and tax prep expert Rhonda Collins, CPA, MBA, EA. Also, Randy Adams, EA, joined the panel. Randy is a Drake Software user and an NATP instructor.

Video transcript:

Megan Sonicksen: Thank you for joining us again for Taxes Today. I’m Megan Sonicksen with NATP and I have the pleasure of moderating this conversation. I’m once again joined by our friends at Drake Software, John Sapp, CPA, Chief Revenue Officer and Federal Tax Analyst, Bob Nolan. Bob is a CPA and EA who is by all accounts a tax offer guru. Also, today we have Randy Adams, EA who’s a Drake Software user and an NATP instructor. And from NATP, we have Rhonda Collins and Sheri Fronsee. Rhonda is our Director of Tax Content and Government Relations, and Sheri is a CPA who’s been a part of the NATP research department for nearly 10 years. Today’s topic of discussion is the earned income tax credit, so let’s get started.

Randy, can you please give us a quick need to know regarding EIC for filing a 2021 tax return?

Randy Adams: Yeah, thanks Megan. We’ve seen some key changes to the age requirements for 2021, so they’ve lowered the minimum age requirement from 25 years old for those individuals without any children on the tax return and eliminated the maximum age requirement of 65 years old, so those are some key changes there. We still have to do the calculation on the tax return, which is looking at four key items.

We look at earned income, which would be salaries, wages, self employment, tips, those types of items. The second thing we look at would be their adjusted gross income. Third, we look at their filing status of the tax payers on the tax return. And lastly, we look at the number of qualifying children that they have on the tax return. So this could be anywhere from zero children all the way up to a maximum of three kids on the tax return.

And then a couple other changes. If someone doesn’t have a lot of earned income in 2021, the IRS is allowing us to go back to 2019 and use the 2019 earned income if that will give the taxpayer a better advantage in using the credit than the 2021 earned income. And finally, it’s a refundable credit, which means that if the taxpayers don’t have tax liability or a lot of tax liability, this will add to their refund base so it’ll help them out in that sense.

Megan Sonicksen: And Sheri, can you discuss how EIC works for taxpayers that don’t have children?

Sheri Fronsee: Well, as Randy mentioned, that was one of the key things that changed this year. For those taxpayers without children, there used to be an age floor and an age ceiling. The floor was 25 years and the age ceiling was 65 years. Those have been eliminated. For the most part now it’s children age 19 and above.

There’s some qualifiers that I’ll talk about in a moment, but the age 65 ceiling, that was eliminated completely. Now with regards to that floor level dropping from 25 to 19, it is however, dropped down to age 18 for your qualifying former youth children or qualified homeless youth. And the definition of those as the foster youth is defined as an individual who on or after they reached the age of 14 was foster care. And then for the homeless, this is defined as an unaccompanied youth who is homeless as like a homeless child or youth, or is unaccompanied at risk of being homeless or self supporting.

And again, like I said, the maximum age limit of 65, that was eliminated, and this helps the retirees who go back to work for whatever reason, whether they need to or want to. Now maybe some of them can catch some EIC. Or what about the grandparents in multi-generation homes, for example, and the grandparents are claiming the children. They now may be eligible for EIC if they’re above the 65 age mark.

Also, any students who are age 24, they’re eligible for EIC if they were a student for at least five calendar months during the year. This pretty much sweeps your graduates in from January to May.

Megan Sonicksen: That’s good information. And you kind of talked about the term qualifying, and it sounds like that’s the key to helping clients claim the credit. So Rhonda, what does a tax professional need to know about the eligibility for the credit?

Rhonda Collins: Okay, Megan, to be eligible for the Earned Income Credit, the individual must have earned income and also must meet the AGI requirements as seen on the slides.

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You make the callBy: NATP Research
December 2, 2021

Question: Ethan purchased one acre of undeveloped land near a shopping plaza about five years ago, with hopes of selling it for a profit in the future. He has paid $15,000 in property taxes on the parcel each year. Ethan currently has an NOL carryover; therefore, the property taxes he paid this year give him no tax savings. Ethan would like to see if there is anything he can do to capitalize the property taxes paid this year. Is that possible?

Answer: Yes, pursuant to §266, Ethan can elect to capitalize the property taxes paid this year on one acre of land. By making this election, the taxes paid will increase his basis in the land. When Ethan sells the land, the taxable gain on the sale will be smaller due to his increased basis that resulted from the capitalized taxes.

To make this election, Ethan will attach a statement to his Form 1040, U.S. Individual Income Tax Return. The attachment needs to mention §266 describing the cost of the property taxes Ethan paid.

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2021 Form 1040 - what’s new? By: National Association of Tax Professionals
November 30, 2021

For some, the 2021 tax season (2020 tax year) is a distant memory and the 2022 filing season (2021 tax year) is highly anticipated for all the unexpected surprises that may come. Some may wonder “will the 2022 filing season be normal?” That’s a tough question!

As many will agree, COVID-19 left its imprint on the tax profession, including tax law changes, staff shortages, new technology to work remotely (perhaps permanently) and changing how we conduct business so we could continue to serve clients. We are not currently hearing any indicators that the 2022 tax filing deadline will be extended, but as we are all too familiar, anything is possible. Add to the mix possible year-end legislation enactment and we have the makings of another abnormal 2022 tax season. Or is this the new normal?

In the midst of change and uncertainty, one thing is for sure, the 2022 tax season will be upon us before we know it. As of the date we published this blog, the 2021 Form 1040 was still in draft form. As a reminder, major changes from recent legislation that may impact your clients 2021 return include:

Proposed 2021 Form 1040 changes and updates

Unnumbered line changes

The first proposed change we see is to the unnumbered line dealing with virtual currency. The proposed question states “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

It is a minor change from 2020, which states “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The word “send” was removed and “acquire” was changed to dispose of.

1

Line 8, other income from Schedule 1

For 2021, other income is coming from Line 10 rather than Line 9 of Schedule 1, and Schedule 1, Line 8, has 17 sublines that detail the various other income types and sources.

Line 8

2

Schedule 1, Line 8

3

Line 10, adjustments to income from Schedule 1, Line 26

For 2021, less common adjustments are listed on Schedule 1, Line 24a through k, with a 24z being a catch-all. For 2020, these adjustments were in the instructions but not listed on the form.

Line 10

4

Schedule 1, Line 24

5

Line 12b, charitable contributions if you take the standard deduction (see instructions)

The cash charitable contribution for non-itemizers moved from Line 10b to a new line, 12b. The deduction is no longer an adjustment to income as it was for 2020. For 2021, the deduction for cash charitable contributions is no longer an above-the-line deduction for taxpayers who claim the standard deduction.

For 2020, the deduction was an above-the line charitable deduction, meaning it may have reduced a taxpayer’s adjusted gross income (AGI). A taxpayer’s AGI is the starting point for determining eligibility for certain tax benefits, such as credits and taxability of Social Security benefits. For 2021, the charitable deduction does not impact AGI, and therefore, some may see some tax consequences in 2021 due to the change.

6

Line 13, qualified business income deduction

The line number stayed the same from 2020 to 2021. For 2021 the line states “Qualified business income deduction from Form 8995 or Form 8995-A.” The word attach was removed from the instruction.

7

Line 20, amount from Schedule 3, Line 8

Reported here are the nonrefundable credits from Schedule 3. Line 6 of this schedule was updated¬¬ to list additional credits such as the adoption credit (6c), credit for elderly or disabled (6d) and the qualified electric vehicle credit (6i).

8

9

Schedule 3 was also expanded to two pages, where the second page has other payments or refundable credits listed as sublines (for reference, this was Line 12 on the 2020 schedule).

10

Line 27, earned income credit (EIC)

Three separate lines are used to report the entries.

11

Line 23, other taxes, including self-employment tax, from Schedule 2, Line 21

The 2021 Schedule 2 adds to the other taxes line items and is now a second page, with the inclusion of new additional taxes (Line 17a through q) of less common items, plus a catchall (Line 17z) at the end. Many of the items listed on the second page of Schedule 2 are not that common.

12

13

Other modifications were made to these forms that we did not address here, including, but not limited to, line numbering changes. Full draft versions of these forms are available now on the IRS’s website:

2021 Form 1040
2021 Schedule 1 (Form 1040)
2021 Schedule 2 (Form 1040)
2021 Schedule 3 (Form 1040)

It is also possible the IRS may make changes to the 2021 Form 1040 and the three schedules we discussed before a final version is issued.

It’s always a good idea to preview the upcoming year’s forms. If you see an item you would like to comment on, the IRS is always looking for feedback on its draft and final forms, as well as its instructions and publications.

Changes to the 1040 is not the only item practitioners need to be aware of. Form 7203 will impact the 1040s of S corporation shareholders and Form 8915-F will impact those with disaster and 2020 COVID distributions. See the quarter one’s TAXPRO Journal CPE article for additional information, which will be available in February 2022.

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About NATP

Whether you’re a tax professional just starting out in your career or an experienced expert, NATP believes in you and the work you do to help your clients. We take pride in providing you with resources you won’t find anywhere else, and helping you succeed in the ever-growing and changing industry.

As tax laws change, you can rely on NATP for professional advocacy within the government, guidance on how to apply updated federal tax code to your clients’ unique situations and relationships with communities of other tax professionals to help foster your career. Explore NATP.

If you’re a taxpayer looking for an expert to help you with your tax planning and preparation, look to the industry’s top preparers. Choose an NATP member.

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