How Does The Child Tax Credit Work For 2021?

How Does The Child Tax Credit Work For 2021?

COVID has had such a major impact on everyones lives in so many different ways. Here as accountants it also means constantly changing already complex tax laws.

In our Free Facebook Group and all around the internet we have been seeing questions on the changes to the Child Tax Credit for 2021 so we can to take the time to break it down for you.

What Are The Typical Parameters Around The Child Tax Credit?

Before we dig too deep into the changes for 2021 specifically, lets talk historically.

  • For 2018-2020 and 2022-2025, the maximum annual CTC is $2,000 per qualifying child.
  • A qualifying child is under age 17 who could be claimed as your dependent for the year.
  • Phase Out If Modified Adjusted Gross Income Exceeds:
    • $200k (Single)
    • $400k (Married)
    • Note: the credit phased out by $50 per $1,000 of MAGI in excess of threshold

What Are The Changes To The CTC For 2021?

For the 2021 tax year only, the American Rescue Plan Act of 2021 (ARPA) makes big, taxpayer-friendly changes to the federal income tax child tax credit (CTC). 

  • Qualifying Children Can Be Up To 17 Years Old
    • vs under 17
  • Maximum Child Tax Credit of $3,000 per Qualifying Child or $3,600 If Age of 5 Or Younger
  • Phase Outs
    • The increased CTC amount ($1,000 or $1,600) above original is phased out for those with MAGI above $75k (Single) or $150k (Married)
    • The “regular” $2,000 CTC amount is subject to the regular phaseout rule.
    • Note:If you’re not eligible for the increased CTC amount for 2021 because your income is too high, you can still claim the regular CTC of up to $2,000, subject to the regular phaseout rule.
  • IRS Will Make Advance CTC Payments (Hopefully)
    • The COVID relief plan establishes a program to make monthly advance payments of CTCs.
    • Payments will equal 50% of the IRS’s estimate of your allowable CTC for 2021.
    • These payments will be made in equal monthly installments from July thru December 2021.
    • They will be using information from your 2020 Form 1040 (or 2019 if you haven’t filed yet) when doing those estimates.
    • Example: Lets say you qualify for a CTC in 2021 of $6,000 for two qualifying children. The IRS would advance you a total of $3,000 (50% of allowable CTC) via monthly payments of $500 each for July thru December. The remaining CTC of $3,000 will occur when filing your 2021 Form 1040.

Hope that helps clear this new change up a little bit!

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.

How Can I Deduct 100% of Employee Recreation and Parties?

How Can I Deduct 100% of Employee Recreation and Parties?

Not too long ago we talked about meal expenses for small businesses. We also discussed how entertainment expenses are no longer deductible but what if we told you that if you do it the right way you can party with your employees and deduct 100% of the cost?

We get questions like this all of the time in our Free Facebook Group so here is a great article to touch on it.

How Is It Possible To Get a 100% Deduction For Entertainment?

If you take Billy Bob, your best client, out golfing, the cost of golf will give you no tax deduction. However, if you take your employees to the local country club, enjoy golf, lunch, dinner, etc it can be 100% deductible.

  • Activities That Qualify for the 100% Employee Entertainment Tax Deduction
    • “expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees” qualify for the 100 percent deduction.
    • Examples: Holiday parties, annual picnics, and summer outings, maintaining a swimming pool, baseball diamond, bowling alley, or golf course.
  • MUST be primarily for the benefit of employees other than a tainted group. A tainted group includes:
    • Highly Compensated Employee (More than $130k in 2021) 
    • Anyone who owns at least 10% interest in the business
    • Any member of the family of a 10% owner (children, spouses, siblings, parents, grandparents, etc.)
    • As an owner you are part of the tainted group which is fine, you just need to make sure the partying is primarily for the benefit of the employees.
    • Primarily = More Than 50%
    • Be sure you hav clear and accurate documentation in your records to support this!

What Else Do I Need To Know? 

Documentation, Documentation, Documentation

  • You still need to meet the business requirement of ordinary and necessary. This should be relatively easy, improving employee morale or creating a fun and inviting culture.
  • Documentation – You must keep good documentation regarding your employee entertainment expenses (just as you would any other business expense).
    • Keep Receipts (Who/What/Where/When/Why)
    • Document the business reason for the entertainment (annual retreat to boost employee morale, office party to celebrate new big client, etc.)
    • Keep record of who the outing all benefits so that you can ensure you are under 50% from the “tainted group”.
    • When coding in your bookkeeping, make sure you have a separate line item so it doesn’t get wrapped into any nondeductible items or 50% meals.

That is it! Now go out and take care of your employees and do a little partying this summer!

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out our Tax Minimization Program!

If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.