People who adopt may benefit from this special tax credit
The adoption process can be expensive. Fortunately, the adoption tax credit can help offset some those expenses Taxpayers who adopted or started the adoption process in 2020 should review the rules for this credit.
Here are some facts to help people understand the credit and if they can claim it when filing their taxes:
- The maximum adoption credit taxpayers can claim on their 2020 tax return is $14,300 per eligible child.
- There are income limits that could affect the amount of the credit
- Taxpayers should complete Form 8839, Qualified Adoption Expenses. They use this form to figure how much credit they can claim on their tax return.
- An eligible child must be younger than 18. If the adopted person is older, they must be physically or mentally unable to take care of themselves.
- This credit is non-refundable. This means the amount of the credit is limited to the taxpayer’s taxes due for 2020. Any credit leftover from their owed 2020 taxes can be carried forward for up to five years.
- Qualified expenses include:
- Reasonable and necessary adoption fees.
- Court costs and legal fees.
- Adoption related travel expenses like meals and lodging.
- Other expenses directly related to the legal adoption of an eligible child.
- If the taxpayer and someone other than a spouse each paid qualified adoption expenses to adopt the same child, the $14,300 credit must be divided between the two of them.
- Expenses may also qualify even if the taxpayer pays them before an eligible child is identified. For example, some future adoptive parents pay for a home study at the beginning of the adoption process. These parents can claim the fees as qualified adoption expenses.
- Qualified adoption expenses don’t include costs paid by a taxpayer to adopt their spouse’s child.
IRS is issuing third round of Economic Impact Payments
The IRS started issuing the third round of Economic Impact Payments. No action is needed by most taxpayers. The IRS will issue payments automatically by direct deposit and through the mail as a check or debit card.
Many people will receive the third payment the same way they received the first and second Economic Impact Payments. Because these payments are automatic for most eligible people, there’s no need to contact financial institutions or the IRS. People can check the Get My Payment tool on IRS.gov for status of their third stimulus payment.
Highlights of the third Economic Impact Payments
In general, most people will get $1,400 for themselves and $1,400 for each qualifying dependent claimed on their tax return. As with the first two Economic Impact Payments, most people will receive their third payment without having to take any action.
The third Economic Impact Payment is based on the taxpayer’s latest processed tax return from either 2020 or 2019. This includes anyone who successfully registered at IRS.gov using the agency’s Non-Filers tool last year or submitted a simplified tax return. If the IRS received and processed a taxpayer’s 2020 return before issuing someone’s third Economic Impact Payment, the amount is based on the 2020 return.
Those who received the first or second payment but don’t receive a payment by direct deposit will generally receive a check or a prepaid debit card, referred to as an EIP Card. The IRS will not add the third payment to an existing EIP card that people received for the first or second round of stimulus payments.
Under the new law, the IRS can’t apply the third Economic Impact Payment to past-due federal debts or back taxes.
Who is eligible for the third Economic Impact Payment
Generally, U.S. citizens or U.S. resident aliens are eligible for the full amount of the third Economic Impact Payment if they and their spouse, if they’re filing jointly, are not a dependent of another taxpayer and have a valid Social Security number and their adjusted gross income on their tax return does not exceed:
- $150,000, if married and filing a joint return or if filing as a qualifying widow or widower.
- $112,500, if filing as head of household.
- $75,000 for eligible individuals using any other filing statuses, such as single filers and married people filing separate returns.
The payments phase out — or reduce — above those AGI amounts. This means taxpayers will not receive a third payment if their AGI exceeds:
- $160,000, if married and filing a joint return or if filing as a qualifying widow or widower.
- $120,000, if filing as head of household.
- $80,000 for eligible individuals using other filing statuses, such as single filers and married people filing separate returns.
More details about the third round of Economic Impact Payments are available on IRS.gov.
The right to confidentiality is a fundamental right of all taxpayers
Information a taxpayer gives the IRS won’t be shared with outside parties, unless allowed by the taxpayer or by law. This is the right to confidentiality. It’s one of ten rights known collectively as the Taxpayer Bill of Rights.
The right to confidentiality means:
- The IRS won’t give any information to a third party without permission from the taxpayer.
- The agency can’t contact third parties such as an employer or bank for information unless they give the taxpayer reasonable notice first.
- The same confidentiality a taxpayer has with an attorney also applies to tax professionals working with the IRS on the taxpayer’s behalf.
- Taxpayers have the right to expect appropriate action will be taken against employees, return preparers and others who wrongfully use or disclose taxpayer return information.
Confidential communications include conversations, messages, documents, and info that:
- Fall within the tax professional’s authority to practice before the IRS, but it doesn’t include tax return preparation.
- Are considered private or restricted between the taxpayer and their attorney.
- Relate to noncriminal tax matters with the IRS or noncriminal tax cases in federal court.
Tax professionals can’t share or use tax information for any reason other than preparing a return.
Melissa Van, Enrolled Agent
Owner, AABS Inc.
New Exclusion of up to $10,200 of Unemployment Compensation
If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on unemployment compensation of up to $10,200. If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation.
The exclusion should be reported separately from your unemployment compensation. See the updated instructions and the Unemployment Compensation Exclusion Worksheet to figure your exclusion and the amount to enter on Schedule 1, lines 7 and 8.
The instructions for Schedule 1 (Form 1040), line 7, Unemployment Compensation, are updated to read as follows.
Line 7 – Unemployment Compensation
You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2020. Report this amount on line 7.
Caution. If the amount reported in box 1 of your Form(s) 1099-G is incorrect, report on line 7 only the actual amount of unemployment compensation paid to you in 2020.
Note. If your modified adjusted income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021 excludes from income up to $10,200 of unemployment compensation paid to you in 2020. For married taxpayers, you and your spouse can each exclude up to $10,200 of unemployment compensation. For example, if you were paid $20,000 of unemployment compensation and your spouse was paid $5,000, report $25,000 on line 7 and report $15,200 on line 8 as a negative amount (in parentheses). The $15,200 excluded from income is $10,200 for you and all of the $5,000 paid to your spouse. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. Use the Unemployment Compensation Exclusion Worksheet to figure your modified AGI and the amount you can exclude.
If you made contributions to a governmental unemployment compensation program or to a governmental paid family leave program and you aren’t itemizing deductions, reduce the amount you report on line 7 by those contributions. If you are itemizing deductions, see the instructions on Form 1099-G.
Caution. Your state may issue separate Forms 1099-G for unemployment compensation received from the state and the additional $600 a week federal unemployment compensation related to coronavirus relief. Include all unemployment compensation received on line 7.
If you received an overpayment of unemployment compensation in 2020 and you repaid any of it in 2020, subtract the amount you repaid from the total amount you received. Enter the result on line 7. Also enter “Repaid” and the amount you repaid on the dotted line next to line 7. If, in 2020, you repaid more than $3,000 of unemployment compensation that you included in gross income in an earlier year, see Repayments in Pub. 525 for details on how to report the payment.
Tip. If you received unemployment compensation in 2020, your state may issue an electronic Form 1099-G instead of it being mailed to you. Check your state’s unemployment compensation website for more information.