There are lots of tax changes to talk about. The year-end government funding and stimulus law includes many easings for individuals and businesses. Other changes for 2021 reflect prior-year inflation.
Start with a second round of stimulus checks for individuals, structured as tax rebates of $600 for single filers and $1,200 for couples filing jointly, plus $600 more for each child under age 17.
Upper-incomers won’t get the payments. They phase out for couples with AGIs above $150,000 … $112,500 for household heads and $75,000 for singles.
IRS will look at the 2019 tax return to figure the amount of the payment in most cases. Since this round of payments will be structured in the same manner as before, the Service should have the relevant information for most individuals.
People with direct deposit should have received the money or will get it soon. Paper checks or prepaid debit cards should be in mailboxes by the end of Jan. By law, IRS has only until Jan. 15 to send out this second round of payments.
Technically, the money is an advance payment of a special 2020 tax credit …
The recovery rebate credit. On your 2020 return, you’ll reconcile this payment, along with the check you received in the first round, with the rebate credit allowed. If the credit exceeds the amounts received, you can claim the balance on your 1040. If the payments you got are more than the credit, you won’t have to repay IRS. If you haven’t received a check and you are entitled to one, you can claim the credit when you file your 2020 return. Note that stimulus payments are not taxable.
A batch of tax breaks that were set to expire after 2020 are now extended.
Some were extended permanently, some through 2025 and others for one year.
Among the permanent breaks: The 7.5% adjusted-gross-income threshold for deducting medical expenses on Schedule A. Lower excise taxes on wine, beer and liquor. The deduction for energy-efficient improvements to commercial buildings.
The above-the-line deduction for college tuition is no more after 2020. Lawmakers terminated it and instead increased the income phaseout limits for the lifetime learning credit to match that of the American Opportunity Tax Credit.
Included in breaks extended through 2025: Seven-year depreciation periods for motor sports complexes. The new-markets and work opportunity tax credits. The exclusion from workers’ wages of up to $5,250 of college debt paid by employers. The credit for employers that provide family and medical leave to workers. The exclusion for forgiven debt on a home is lowered from $2 million to $750,000.
Extended through 2021: Deduction for mortgage insurance premiums. A slew of business and energy tax incentives. The limited credit for windows and doors added to one’s residence. Plus shorter depreciation lives for young racehorses.
More on Stimulus
The following easings on cash gifts to charity in 2020 also apply for 2021:
Nonitemizers can write off up to $300 of charitable cash contributions. (For 2021 only, the ceiling is $600 for married couples who file a joint return.)
The 60%-of-AGI limit on cash donations by individuals is suspended.
The taxable income limit on charitable gifts of cash by C corps is 25%.
Good news for firms that take out Paycheck Protection Program loans:
The debt forgiveness is not taxable … and businesses can deduct expenses that result in forgiveness of the loan. IRS had said that to prevent a double tax benefit, the expenses are not deductible. But now that Congress has reversed IRS on this issue, the Revenue Service was forced to backtrack and declare its prior guidance obsolete. Additionally, Congress has extended the PPP program, provided more funding for loans, tweaked loan eligibility, and simplified the forgiveness process for loans up to $150,000.
The employee retention tax credit has been extended and expanded. The payroll tax credit for firms that were financially hurt by the COVID-19 pandemic but kept paying wages goes through June 30, 2021. And from Jan. 1 to June 30, 2021, the credit is 70% of up to $10,000 in qualified wages paid per employee per quarter, resulting in a maximum credit of $7,000 per worker per quarter. (The top credit for 2020 is $5,000 total per worker). Also, the eligibility rules have been eased. Furthermore, employers who received PPP loans can qualify for the ERTC, but only with respect to wages paid that are not funded by forgiven PPP loan proceeds.
Also extended: The payroll credit for mandated sick and family leave paid by firms to employees affected by COVID-19. It goes through March 31, 2021.
Workers have more time to pay back deferred employee payroll taxes. Last year, President Trump gave employers the option to defer the withholding, deposit and payment of a worker’s 6.2% share of Social Security tax from Sept. 1, 2020, to Dec. 31, 2020. The deferral applied to employees with biweekly wages under $4,000. Employers had to then take additional withholding from employee paychecks from Jan. to April 2021. The new law extends repayment through Dec. 31, 2021.
Businesses get a nice surprise. They can deduct 100% of business meals in 2021 and 2022, as Congress decided to suspend the 50% haircut for two years to encourage more restaurant dining. This includes client meals as well as meals for employees on business travel. Note that this easing does not apply to 2020.
Victims of federally declared natural disasters mainly in 2020 get relief akin to the easings given to victims of natural disasters in recent years.
Individuals can take personal disaster losses even if they don’t itemize.
The 10% penalty on pre-age-59½ payouts from retirement accounts is waived as long as the IRA or retirement plan withdrawals are not greater than $100,000. The income tax due on such distributions can be spread over a three-year period.
There’s a special break for disaster-affected firms that keep paying workers despite suspension of business operations or shutdowns because of the disaster. They get a 40% tax credit for up to $6,000 of wages paid to each idle employee.
Corporations can fully deduct cash donations for federal disaster relief.
2019 income can be used to figure the 2020 earned income tax credit.
Ditto for the refundable child tax credit. This will prevent a cut in these breaks for lower-incomers whose jobs have been suspended or lost because of COVID-19.
There is relief for health and dependent care flexible spending arrangements. Employers may opt for FSAs to permit carryover of unused amounts from 2020 to 2021, and from 2021 to 2022, and to give a 12-month grace period for unused funds.
The income tax brackets for 2021 are only slightly wider than for last year because of inflation during the 12-month period … from Sept. 2019 through Aug. 2020 … used to figure the adjustments. Tax rates do not change.
|Marrieds: If taxable income is||The tax is|
|Not more than $19,900||10% of taxable income|
|Over $19,900 but not more than $81,050||$1,990.00 + 12% of excess over $19,900|
|Over $81,050 but not more than $172,750||$9,328.00 + 22% of excess over $81,050|
|Over $172,750 but not more than $329,850||$29,502.00 + 24% of excess over $172,750|
|Over $329,850 but not more than $418,850||$67,206.00 + 32% of excess over $329,850|
|Over $418,850 but not more than $628,300||$95,686.00 + 35% of excess over $418,850|
|Over $628,300||$168,993.50 + 37% of excess over $628,300|
|Singles: If taxable income is||The tax is|
|Not more than $9,950||10% of taxable income|
|Over $9,950 but not more than $40,525||$995.00 + 12% of excess over $9,950|
|Over $40,525 but not more than $86,375||$4,664.00 + 22% of excess over $40,525|
|Over $86,375 but not more than $164,925||$14,751.00 + 24% of excess over $86,375|
|Over $164,925 but not more than $209,425||$33,603.00 + 32% of excess over $164,925|
|Over $209,425 but not more than $523,600||$47,843.00 + 35% of excess over $209,425|
|Over $523,600||$157,804.25 + 37% of excess over $523,600|
|Household Heads: If taxable income is||The tax is|
|Not more than $14,200||10% of taxable income|
|Over $14,200 but not more than $54,200||$1,420.00 +12% of excess over $14,200|
|Over $54,200 but not more than $86,350||$6,220.00 + 22% of excess over $54,200|
|Over $86,350 but not more than $164,900||$13,293.00 + 24% of excess over $86,350|
|Over $164,900 but not more than $209,400||$32,145.00 + 32% of excess over $164,900|
|Over $209,400 but not more than $523,600||$46,385.00 + 35% of excess over $209,400|
|Over $523,600||$156,355.00 + 37% of excess over $523,600|
Standard deductions for 2021 rise a bit. Married couples get $25,100 plus $1,350 for each spouse age 65 or older. Singles claim $12,550 … $14,250 if 65 or up. Household heads get $18,800 plus $1,700 once they reach age 65. Blind people receive $1,350 more ($1,700 if unmarried and not a surviving spouse).
Tax rates on long-term capital gains and qualified dividends do not change.
But the income thresholds to qualify for the various rates go up for 2021. The 0% rate applies for individual taxpayers with taxable income up to $40,400 on single returns, $54,100 for head-of-household filers and $80,800 for joint returns. The 20% rate starts at $445,851 for singles, $473,751 for heads of household and $501,601 for couples filing jointly. The 15% rate is for filers with taxable incomes between the 0% and 20% break points. The 3.8% surtax on net investment income kicks in for single people with modified AGI over $200,000 … $250,000 for marrieds.
AMT exemptions rise for 2021 to $114,600 for couples and $73,600 for singles and household heads. The exemption phaseout zones start at $1,047,200 for couples and $523,600 for others. The 28% AMT rate kicks in above $199,900.
Estate & Gift Tax
The lifetime estate and gift tax exemption for 2021 jumps to $11,700,000 … $23,400,000 for couples if portability is elected by timely filing Form 706 after the death of the first-to-die spouse. The estate tax rate remains steady at 40%.
The gift tax exclusion remains $15,000 per donee. You can give up to $15,000 ($30,000 if your spouse agrees) to each child, grandkid or any other person in 2021 without having to file a gift tax return or tap your lifetime estate and gift tax exemption.
The Social Security annual wage base for 2021 is $142,800, a $5,100 hike. The Social Security tax rate on employers and employees stays pat at 6.2%. Both will continue to pay the 1.45% Medicare tax on all compensation, with no cap. Individuals also pay the 0.9% Medicare surtax on wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn’t hit employers.
The 2021 standard mileage rate for business driving falls to 56¢ a mile. The mileage allowance for medical travel and military moves drops to 16¢ a mile in 2021. The charitable driving rate stays put at 14¢ a mile. It’s fixed by law.
A key dollar threshold on the 20% deduction for pass-through income rises in 2021. Self-employeds and owners of LLCs, S corporations and other pass-throughs can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes of more than $329,800 for joint filers and $164,900 for singles.
$1,050,000 of assets can be expensed in 2021, and this amount phases out dollar for dollar once more than $2,620,000 of assets are put into service during 2021.
U.S. taxpayers working abroad have a larger income exclusion … $108,700.
The annual cap on deductible contributions to HSAs rises in 2021 to $3,600 for self-only coverage and $7,200 for family coverage. People born before 1967 can put in $1,000 more. Qualifying insurance policies must limit out-of-pocket costs to $14,000 for family health plans and $7,000 for people with individual coverage. Minimum policy deductibles remain $2,800 for families and $1,400 for individuals.
The limits on deducting long-term-care premiums are higher in 2021. Taxpayers who are age 71 or older can write off as much as $5,640 per person. Filers age 61 to 70 … $4,520. Those who are 51 to 60 can deduct up to $1,690. Individuals who are 41 to 50 can take $850. And people age 40 and younger … $450. For most, long-term-care premiums are medical expenses deductible only by itemizers on Schedule A. Self-employed people can deduct them on Schedule 1 of the 1040.
2021 income caps are higher for tax-free EE and I bonds used for education. The exclusion starts phasing out above $124,800 of modified AGI for couples and $83,200 for others. It ends at modified AGI of $154,800 and $98,200, respectively. The savings bonds must be redeemed to help pay for tuition and fees for college, graduate school or vocational school for the taxpayer, spouse or a dependent.
More taxpayers can qualify for the lifetime learning credit in 2021. The break begins to phase out at modified AGIs of $160,000 for couples and $80,000 for singles. Congress hiked the phaseout in exchange for getting rid of the tuition deduction.
The adoption credit is taken on up to $14,440 of qualified expenses in 2021. The full credit is available for a special-needs adoption even if it costs less. The credit phases out for filers with modified AGIs over $216,660 and ends at $256,660.
The exclusion for company-paid adoption aid also increases, to $14,400.
As always, we will report on changes from IRS, Congress and the courts. And with a new president, Democrats controlling both houses of Congress by a nose, and expectations of more stimulus relief, 2021 should be an interesting year.