What's New for Tax Year 2021

Tuition and fees deduction not available.

The tuition and fees deduction is not available after 2020. Instead, the income limitations for the lifetime learning credit have been increased.

Economic impact payment—EIP 3.

Any economic impact payment you received is not taxable for federal income tax purposes, but will reduce your recovery rebate credit.

2021 Recovery rebate credit.

This credit is figured like last year's economic impact payment, EIP 3, except eligibility and the amount of the credit are based on your tax year 2021 information. 

Standard deduction amount increased.

For 2021, the standard deduction amount has been increased for all filers. The amounts are:
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Single or Married filing separately—$12,550.
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Married filing jointly or Qualifying widow(er)—$25,100.
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Head of household—$18,800.

Virtual currency.

If, in 2021, you engaged in a transaction involving virtual currency, you will need to answer “Yes” to the question on page 1 of Form 1040 or 1040-SR.  Do not leave this field blank. The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency.

Credits for sick and family leave for certain self-employed individuals.

The Families First Coronavirus Response Act (FFCRA) helped self-employed individuals affected by coronavirus by providing paid sick leave and paid family leave credits equivalent to those that employers are required to provide their employees for qualified sick leave wages and qualified family leave wages. The COVID-related Tax Relief Act of 2020 extended the period during which individuals can claim these credits. 

Extension and expansion of credits for sick and family leave.

The American Rescue Plan Act of 2021, enacted on March 11, 2021 (ARP) provides that certain self-employed individuals can claim credits for up to 10 days of “paid sick leave,” and up to 60 days of “paid family leave,” if they are unable to work or telework due to circumstances related to coronavirus. Self-employed individuals may claim these credits for the period beginning on April 1, 2021, and ending September 30, 2021. 

Form 9000, Alternative Media Prefer-ence.

Beginning in 2021, taxpayers with print disabilities can use Form 9000, Alternative Media Preference, to elect to receive notices from the IRS in an alternative format including Braille, large print, audio, and electronic. You can attach Form 9000 to your Form 1040 or 1040-SR or you can mail it separately. 

All taxpayers now eligible for Identity Protection PIN.

Beginning in 2021, the IRS Identity Protection PIN (IP PIN) Opt-In Program has been expanded to all taxpayers who can properly verify their identity. An IP PIN helps prevent your social security number from being used to file a fraudulent federal income tax return. You can use the Get An IP PIN tool on IRS.gov to request an IP PIN, file Form 15227 if your income is $72,000 or less, or make an appointment to visit a Taxpayer Assistance Center.

Direct deposit now available for returns filed late.

You can now receive a direct deposit of your refund even if you file your 2021 return after November 30, 2022.

Expanded dependent care assistance.

ARP expanded the child and dependent care tax credit for 2021 by making it re-fundable for certain taxpayers and making it larger. For 2021, the dollar limit on qualifying expenses increases to $8,000 for one qualifying person and $16,000 for two or more qualifying persons. The rules for calculating the credit have also changed; the percentage of qualifying expenses eligible for the credit has increased, along with the income limit at which the credit begins phasing out. Additionally, for taxpayers who receive dependent care benefits from their employer, the dollar limit of the exclusion amount increases for 2021. 

Child tax credit.

Under ARP, the child tax credit has been enhanced for 2021. The child tax credit has been extended to qualifying children under age 18. Depending on modified adjusted gross income, you may receive an enhanced credit amount of up to $3,600 for a qualifying child under age 6 and up to $3,000 for a qualifying child over age 5 and under age 18. The enhanced credit amount begins to phase out where modified adjusted gross income exceeds $150,000 in the case of a joint return or surviving spouse, $112,500 in the case of a head of household, and $75,000 in all other cases.
If you (or your spouse if filing jointly) lived in the United States for more than half the year, the child tax credit will be fully refundable even if you don't have earned income. If you don't meet this residency requirement, your child tax credit will be a combination of a nonrefundable child tax credit and a refundable additional child tax credit, as was the case in 2020. The credit for other dependents has not been enhanced and is figured as it was in 2020.

Changes to Schedule 8812.

Because of the changes made by ARP, detailed discussion of the child tax credit, and how to figure your child tax credit and credit for other dependents, which were previously part of these instructions, has been moved to the Instructions for Schedule 8812 (Form 1040). If you are claiming the nonrefundable child tax credit, refundable child tax credit, additional child tax credit, or credit for other dependents, complete Schedule 8812 and attach it to your Form 1040 or 1040-SR.

Premium tax credit (PTC).

ARP expanded the PTC by eliminating the limitation that a taxpayer's household income may not exceed 400% of the Federal Poverty Line and generally increases the credit amounts. In addition, in 2021, if you receive unemployment compensation, you are generally eligible to claim the PTC if you meet the other requirements. 

Changes to the earned income credit (EIC).

For 2021, the following changes have been made to the EIC.
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EIC rules for taxpayers without a qualifying child.

Special rules apply if you are claiming the EIC without a qualifying child. In these cases, the minimum age has been lowered to age 19 except for specified students who must be at least age 24 at the end of the year. However, the applicable minimum age is lowered further for former foster youth and qualified homeless youth to age 18. Additionally, you no longer need to be under age 65 to claim the EIC without a qualifying child.
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EIC rules for taxpayers with a qualifying child.

If you are claiming the EIC with a qualifying child, you should follow the rules that apply to filers with a qualifying child or children when determining whether you are eligible to claim the EIC even if your qualifying child hasn't been issued a valid SSN on or before the due date of your return (including extensions). However, when determining the amount of EIC that you are eligible to claim on your return, you should follow the rules that apply to taxpayers who do not have a qualifying child.
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Phaseout amounts increased.

The amount of the credit has been increased and the phaseout income limits at which you can claim the credit have been expanded.
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Rules for separated spouses.

If you are married but don't file a joint return, you may qualify to claim the EIC if you live with a qualifying child for more than half the year and either live apart from your spouse for the last 6 months of 2021 or are legally separated accord-ing to your state law under a written separation agreement or a decree of sepa-rate maintenance and do not live in the same household as your spouse at the end 2021.
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Investment income limit in-creased.

The amount of investment income you can receive and still be eligible to claim the EIC has increased to $10,000.
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Prior year (2019) earned income.

You can elect to use your 2019 earned income to figure your 2021 earned in-come credit if your 2019 earned income is more than your 2021 earned income. 

File Schedule EIC (Form 1040) if you have a qualifying child.

If you have at least one child who meets the conditions to be your qualifying child for purposes of claiming the EIC, complete and attach Schedule EIC to your Form 1040 or 1040-SR even if that child doesn't have a valid SSN. 

Forgiveness of Paycheck Protection Program (PPP) Loans.

The forgiveness of a PPP Loan creates tax-exempt income, so you don't need to report the income on Form 1040 or 1040-SR, but you do need to report certain information related to your PPP Loan. 

Identity verification.

The IRS launched an improved identity verification and sign-in process that enables more people to securely access and use IRS online tools and applications. To provide verification services, the IRS is using ID.me, a trusted technology provider. The new process is one more step the IRS is taking to ensure that taxpayer information is provided only to the person who legally has a right to the data. Taxpayers using the new mobile-friendly verification procedure can gain entry to existing IRS online services such as the Child Tax Credit Update Portal, On-line Account, Get Transcript Online, Get an Identity Protection PIN (IP PIN), and Online Payment Agreement. Additional IRS applications will transition to the new method over the next year. Each online service will also provide information that will instruct taxpayers on the steps they need to follow for access to the service.