2021 Federal Tax Laws
****THE FOLLOWING IS IMPORTANT INFORMATION
This is an outline of some of the biggest changes to the new tax law that went into effect beginning in 2018 and are still in effect in addition to new tax benefits offered in the Covid Cares Act of 2020.
The Covid Cares Act permitted you to withdraw up to $100,000 in 2020 from your retirement accounts (Traditional IRA, Roth IRA, 401K, 403b, SEP) as long as you were impacted economically by the pandemic in 2020. If you are younger than 59 1/2 years old you would normally receive a 10% penalty for an early withdrawal from theses types of accounts but through the Cares Act they are waving this. You will still owe tax on the amount you withdraw but you are able to spread that tax burden evenly over 3 years. This withdrawal from your retirement accounts is not permitted in 2021. If you are able to recover economically you then have the option to deposit the funds back into you retirement account within those 3 years and get a refund of the taxes you previously paid.
The current 7-tier tax bracket will be reduced to four tax brackets. They are as follows:
SINGLE FILERS
35% - Income $209,4264 to $523,600
37% - Income $523,601 and up $40,524
22% - Income $40,525 to $86,374
24% - Income $86,375 to $164,924
32% - Income $164,925 to $209,424
35% - Income $209,425 to $523,599
37% - Income $523,600 and up
MARRIED FILERS
10% - Income $0 to $19,899
12% - Income $19,900 to $81,049
22% - Income $81,050 to $172,749
24% - Income $172,750 to $329,849
32% - Income $329,850 to $418,849
35% - Income $418,850 to $628,299
37% - Income $628,300 and up
This next section is particularly important to your deductions as taxpayers.
STANDARD DEDUCTION:
The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
CHILD CREDITS:
The American Rescue Plan, which was enacted in March 2021, provides a dramatic, one-year expansion of the child tax credit for the 2021 tax year. One of the biggest changes is to the amount of the credit. For 2021, it jumps from $2,000 to $3,000 for most children – but to $3,600 for children 5 years old and younger. The extra amount ($1,000 or $1,600) is reduced – potentially to zero – for families with higher incomes, though. For people filing their tax return as a single person, the extra amount starts to phase-out if their adjusted gross income is above $75,000. The phase-out begins at $112,500 for head-of-household filers and $150,000 for married couples filing a joint return. The credit amount is further reduced under the pre-existing $200,000/$400,000 phase-out rules.
Another important change is that the 2021 credit is fully refundable. The $2,500-of-earned-income required is dropped for 2021, too. Children who are 17 years old also qualify for the 2021 credit.
Last but not least, half of the 2021 credit amount is being paid in advance through monthly payments that started on July 15 and will end on December 15. You'll claim the other half of the credit on your 2021 tax return. You'll also have to reconcile the monthly payments that you receive from the IRS in 2021 with the child tax credit that you're actually entitled to claim when you file your 2021 return. If the credit amount exceeds the total monthly payments, you can claim the excess credit on your return. But if the credit amount is less than the payments, you may or may not have to pay back the excess.
CHILD AND DEPENDENT CARE CREDITS:
The American Rescue Plan also made significant improvements to the child and dependent care credit. But, again, the changes only apply to the 2021 tax year (although President Biden wants to make the enhancements permanent).
By way of comparison, the 2020 credit covered child and dependent care expenses for either (1) a dependent child under age 13 when the care was provided, or (2) a qualifying disabled dependent or spouse of any age that lived with you. The non-refundable credit was worth 20% to 35% of up to $3,000 in eligible expenses for one child/disabled person or $6,000 for two or more. The percentage decreased as income exceeded $15,000.
For 2021, the child and dependent care credit is fully refundable. The maximum credit percentage also jumps to 35% to 50%. More of your care expenses are available for the credit, too. For 2021, the credit is allowed for up to $8,000 in expenses for one child/disabled person and $16,000 for more than one. When the 50% maximum credit percentage is applied, that puts the top credit for the 2021 tax year at $4,000 if you have just one child/disabled person in your family and $8,000 if you have more.
In addition, the full child and dependent care credit will be allowed for families making less than $125,000 a year (instead of $15,000 per year). After that, the credit starts to phase-out. However, all families making between $125,000 and $438,000 will receive at least a partial credit.
RETIREMENT PLANS:
Required Minimum Distributions (RMDs) are back for 2021. Seniors were allowed to skip their RMDs in 2020 without having to pay a penalty. But the RMD suspension only applied for one year. So, anyone who is at least 72 years old by the end the year is required to take an RMD for 2021. Also please note that if you have an inherited IRA
Many key dollar limits on retirement plans and IRAs remain the same for 2021. For example, the maximum contribution limits for 401(k), 403(b) and 457 plans stay at $19,500, while people born before 1972 can once again put in $6,500 more as a "catch-up" contribution. The 2021 cap on contributions to SIMPLE IRAs also stays the same at $13,500, plus an extra $3,000 for people age 50 and up.
The 2021 contribution limit for traditional IRAs and Roth IRAs also stays steady at $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and up. However, the income ceilings on Roth IRA contributions went up. Contributions phase out in 2021 at adjusted gross incomes (AGIs) of $198,000 to $208,000 for couples and $125,000 to $140,000 for singles (up from $196,000 to $206,000 and $124,000 to $139,000, respectively, for 2020).
Deduction phaseouts for traditional IRAs also start at higher levels in 2021, from AGIs of $105,000 to $125,000 for couples and $66,000 to $76,000 for single filers (up from $104,000 to $124,000 and $65,000 to $75,000 for 20209). If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse starts at $198,000 of AGI and ends at $208,000 (they were $196,000 and $206,000 for 2020).
ITEMIZED DEDUCTIONS:
This is the area that had the most dramatic changes from the 2018 tax law. The new law raised the standard deduction and therefore eliminated most of the itemized deductions. Itemized deductions are things like medical expenses, state and local taxes, mortgage interest, property and personal property taxes, charitable contributions, tax preparer expense & unreimbursed employee job expenses. If these deductions add up to more than your allotted standard deductions then you are allowed to use those to your benefit instead of the standard deduction.
The following deductions remain:
- Charitable contributions remain but with the increased standard deduction it may discourage taxpayers that normally contribute as they might not get the deduction. Update in 2021 individual are once again able to deduct up to $300 in charitable contributions in addition to the standard deduction and married filers filing jointly can deduct up to $600.
- Property taxes, state and local tax & sales tax. This has been bundled into one. You can chose two of these three to deduct but they are capped in total at $10,000. This negatively impacts home owners particularly in high taxed regions of the country.
- Mortgage interest but again not for all. This new plan would reduce your allowed deduction to up to two mortgages totally no more than $750,000. This again punishes those in higher housing markets.
- Student loan interest is still allowed as a deduction up to $2,500 with certain income limitations.
The following are the deductions which the 2018 new tax laws eliminated :
- Unreimbursed Employee Expenses - This is of particular interest to those in the freelance workforce. A good example of this is the performing artist. These employees are required to stay up on their craft at their own expense. Some of these are as follows:
- Many of these artists pay an agent at least 10% of their income.
- Most pay 2% to 4% to their union from weekly incomes.
- Tools or musical instruments. Many musicians have anywhere from $20,000 to $200,000 in instrument costs. Also many of these deductions are depreciated over 7 years. At this time it appears that those taxpayers that haven’t exhausted their deductions through depreciation would not recover the remaining deduction.
- Promotional materials and advertising to remain relevant in a short term employment contract market.
- Home Office Expenses
- Required work clothing or uniforms
- Required travel, lodging and food in the required course of their work.
- Medical Expenses - The new tax law increased the limits that can be deducted. Taxpayers that incur major medical expenses can now only deduct the amounts that exceed 10% of their adjusted gross income.
- Tax Preparation fees
- Moving Expenses for Work - The old plan allowed a taxpayer to deduct these expenses if there new job is full-time and the new location is more than 50 miles from their previous location. However the new law that exists eliminates this for all except those in the armed services. It should be noted that this deduction is still allowed for businesses even if they move their business overseas.