Every year, it’s goes without saying that there will be changes to current tax law and this year is no different. From standard deductions to health savings accounts and tax rate schedules, here’s a checklist of tax changes to help you plan the year ahead.
In 2021, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion.
The tax rate structure, which ranges from 10 to 37 percent, remains similar to 2020; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise, and as a reminder, personal exemptions have been eliminated through tax year 2025.
There has been an increase in the standard deduction increases to $12,550 for individuals (up from $12,400 in 2020) and to $25,100 for married couples (up from $24,800 in 2020).
Alternative Minimum Tax (AMT)
The AMT exemption amounts also saw an increase. Moving to $73,600 for individuals (up from $72,900 in 2020) and $114,600 for married couples filing jointly (up from $113,400 in 2020).
The phase-out threshold also saw an increases to $523,600 ($1,047,200 for married filing jointly). Keep in mind that both the exemption and threshold amounts are indexed annually for inflation.
For taxable years beginning in 2021, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,100.
This amount is also used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.
One of the requirements for the parental election is that a child’s gross income for 2021 must not be more than $11,000 with a floor of $1,100.
Health Savings Accounts (HSAs)
Current or future medical expenses can be paid for with the contributions made to a Health Savings Account (HSA).
This can be for the owner of such account, his or her spouse and any qualifying dependent. However, these medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
Medical Savings Accounts (MSAs)
Medical Savings Accounts (MSAs) are of two types: There is The Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA but is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder.
To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare but note that both MSAs require that you are enrolled in a high-deductible health plan (HDHP).
High Deductible Health Plan – for self only coverage.
A high deductible health plan for self-only coverage refers to a health plan that has an annual deductible that is not less than $2,400 ($2,350 in 2020)and not more than $3,600 (up $50 from 2020).
Under this plan the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot not exceed $4,800 (up $50 from 2020).
High Deductible Health Plan – family coverage. For taxable years beginning in 2021, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,800 and not more than $7,150, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,750.
AGI Limit for Deductible Medical Expenses
In 2021, the deduction threshold for deductible medical expenses is 7.5 percent of adjusted gross income (AGI), made permanent by the Consolidated Appropriations Act, 2021.
Eligible Long-Term Care Premiums
Long-term care premiums are treated the same as health care premiums and are deductible on your taxes subject to certain limitations.
For individuals who are age 40 or younger at the end of 2021, the limitation is $450. Persons more than 40 but not more than 50 can deduct $850. Those more than 50 but not more than 60 can deduct $1,690 while individuals more than 60 but not more than 70 can deduct $4,520. The maximum deduction is $5,640 and applies to anyone more than 70 years of age.
The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly) remains in effect for 2021, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the tax.
Foreign Earned Income Exclusion
The foreign earned income exclusion amount is $108,700 for 2021, up from $107,600 in 2020.
Long-Term Capital Gains and Dividends
Tax rates on capital gains and dividends for 2021, remain at the same rates as 2020 (0%, 15%, and a top rate of 20%); however, threshold amounts have increased: the maximum zero percent rate amounts are $40,400 for individuals and $80,800 for married filing jointly.
For an individual taxpayer whose income is at or above $445,850 ($501,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $40,400 and below $445,850 for single filers).
Estate and Gift Taxes
During calendar year 2021, for an estate of any decedent the basic exclusion amount is $11.70 million, indexed for inflation (up from $11.58 million in 2020). However, the maximum tax rate remains at 40 percent. The annual exclusion for gifts remains at $15,000.
A non-refundable (only those individuals with tax liability will benefit) credit of up to $14,440 is available for qualified adoption expenses for each eligible child during calendar year 2021.
Earned Income Tax Credit
The maximum Earned Income Tax Credit (EITC) for low and moderate-income workers and working families rises to $6,728 up from $6,660 in 2020.
The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Child Tax Credit
The child tax credit is $2,000 per child for tax years 2020 through 2025. The refundable portion of the credit is $1,400 so this means that even if taxpayers do not owe any tax, they can still claim the credit.
A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older).
Child and Dependent Care Tax Credit
There is no change to the Child and Dependent Care Tax Credit. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2021.
If you have two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher-income earners, the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income. This tax credit is nonrefundable.
American Opportunity Tax Credit and Lifetime Learning Credit
For the American Opportunity Tax Credit the maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000 per return.
To claim the full credit for either, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
Prior to the passage of the Consolidated Appropriations Act, 2021, taxpayers with MAGI of $139,000 (joint filers) or $69,500 (single filers) were not able to claim the Lifetime Learning Credit.
Taxpayers, please be aware that while the phase-out limits for Lifetime Learning Credit have been increased, the qualified tuition and expenses deduction has been repealed starting in 2021.
Interest on Educational Loans
The maximum deduction for interest paid on student loans is $2,500. The deduction begins to be phased out for higher-income taxpayers with modified adjusted gross income of more than $70,000 ($140,000 for joint filers) and is completely eliminated for taxpayers with modified adjusted gross income of $85,000 ($170,000 joint filers).
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains at $19,500.
Contribution limits for SIMPLE plans also remain at $13,500. The maximum compensation used to determine contributions increases to $290,000 (up from $285,000 in 2020).
Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $66,000 and $76,000.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $105,000 to $125,000.
For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $198,000 and $208,000.
The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000.
The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
The AGI limit for the Saver’s Credit (also known as the Retirement Savings Contribution Credit) for low and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000 in 2020; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500 in 2020.
User | 6/01/2021