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As taxpayers begin to prepare for the opening of filing season, there are a number of new items worth noting in the 2021 Form 1040 (and Form 1040-SR), as well as in the accompanying instructions.
2021 Recovery Rebate Credit
The 2021 recovery rebate credit was paid out to eligible individuals as an advance payment (EIP) based on 2019 or 2020 tax year information. Eligible individuals who did not qualify for or receive the full amount of the third EIP (including any applicable plus-up payments) may be able to claim the 2021 recovery rebate credit based on their 2021 tax year information.
An eligible individual must file a 2021 tax return to claim the credit.
Forgiveness of Paycheck Protection Program (PPP) Loans on 2021 Returns
While the forgiveness of PPP loans does not produce taxable income, certain loan-related information must be reported on 2021 tax forms. Taxpayers may treat tax-exempt income resulting from the forgiveness of a PPP loan as received or accrued at any of the following three points:
- when the taxpayer pays or incurs eligible expenses;
- when the taxpayer applies for forgiveness of the PPP Loan; or
- when forgiveness of the PPP Loan is granted.
Taxpayers with tax-exempt income resulting from a forgiven PPP loan should attach a statement that includes the following information for each loan and tax year:
- Name, address, and ITIN or SSN;
- Statement noting the application section of Rev. Proc. 2021-48, and applicable tax year;
- Amount of tax-exempt income from forgiveness of the PPP loan received or accrued and for what taxable year (2020 or 2021); and
- Whether forgiveness of the PPP Loan has been granted as of the return date.
The taxpayer should also write “RP2021-48” at the top of the attached statement.
Virtual Currency on 2021 Returns
Taxpayers will again be asked about virtual currency transactions on their personal income tax returns. However, the wording of the question on the 2021 Form 1040 has been narrowed to focus on taxable transactions. The question asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Taxpayers must check either the “Yes” or “No” box; they should not leave the field blank.
If a taxpayer’s only transactions involving virtual currency during 2021 were purchases of virtual currency for real currency (including the use of electronic platforms such as PayPal and Venmo), they do not need to check the “Yes” box.
Changes to Schedule 8812 for 2021 Returns
For tax year 2021, Schedule 8812 (Form 1040), Credits for Qualifying Children and Other Dependents, is expanded to reflect changes made by the American Rescue Plan Act of 2021. Taxpayers should use the revised schedule and accompanying instructions to calculate and report child tax credits and the credit for other dependents.
Taxpayers claiming the following credits must complete Schedule 8812 and attach it to Form 1040 or 1040-SR:
- nonrefundable child tax credit;
- refundable child tax credit;
- additional child tax credit; or
- credit for other dependents.