2021 Year End Letter

TAX TACTIC: When appropriate and allowable, convert nondeductible home equity debt into deductible acquisition debt. This may be accomplished by using home equity loan proceeds to pay for home improvements. For 2021, you can still deduct mortgage interest on the first $750,000 of new acquisition debt, defined as debt used to buy, build or substantially improve a qualified home. (The prior threshold of $1 million is “grandfathered” for certain older loans.) The deduction for home equity loans, up to the first $100,000 of debt, is suspended for 2018 through 2025. Thus, if you take out a new home equity loan to make a substantial home improvement, it qualifies as acquisition debt. The interest is deductible within the usual tax law limits. Home Improvements Previously, you could generally deduct mortgage interest on loans that qualified as either “acquisition debt” or “home equity debt,” within generous limits. But the Tax Cuts and Jobs Act (TCJA) revised the rules, beginning in 2018. Notably, it eliminated the current deduction for home equity debt. Child Tax Credit ARPA provides several key enhancements to the Child Tax Credit (CTC) for the 2021 tax year. TAX TACTIC: Take full advantage of the latest rules for the CTC. Notably, ARPA includes the following changes that may benefit your family. • The maximum credit increases from $2,000 to $3,000 for a qualifying child ($3,600 for qualifying children under age six). • The definition of a qualifying child expands to include children under age 18 at the end of the year (up from age 17). • The credit is fully refundable. Previously, only $1,400 was refundable. • Although the credit begins to phase out at lower income levels, taxpayers adversely affected by these new ranges can elect to claim the $2,000 credit under the prior rules. • Finally, the IRS began making advance payments of the CTC during the second half of the year. But you may have chosen not to receive advance payments (or you can stop now). TIP: Do not forget that the advance payments will be reflected on your 2021 return. This may result in a smaller tax refund than you were expecting.

TIP: If you were planning to use personal funds for a home improvement and a home equity loan for another purpose – say, a child’s education – you might switch things around.