Standard Deduction and Personal Exemption
Standard deductions increase slightly from 2020 as follows:
Single = $12,550
Married Filing Joint = $25,100
Head of Household = $18,800
Child Tax Credit
The 2021 child tax credit had a few major changes. The credits for 2021 are as follows (subject to AGI limitations):
$3,000 for each child ages 6 to 17 (17 year old children are eligible for the credit in 2021)
$3,600 for each child under age 6
Eligibility for the above increased credits phase out at AGI of $150,000 married/$112,500 head of household/$75,000 single.
$2,000 per child (ages 17 and younger) for higher income taxpayers ($400,000 or less for married/$200,00 or less all other taxpayers) who do not qualify for the above listed increased tax credits in 2021.
Taxpayers who qualified for the child tax credit based on their 2020 tax returns and received advance payments in 2021 from the IRS, must reconcile payments received and any changes to their 2021 filing status when filing their 2021 tax return. This is very important to avoid incurring penalties and interest for filing incorrect tax returns. A change in filing status or income between 2020 and 2021 could disqualify individuals from receiving the full credit (i.e. single in 2020 to married in 2021 with increased income).
Medical Expense Deduction
The AGI threshold for 2021 remains at 7.5%. Therefore, any out of pocket medical expenses you incur above 7.5% of your AGI (and you exceed the standard deduction amount) can be deducted. You must be able to itemize deductions to qualify.
Charitable Contributions
More donations to charity can be deducted for 2021 under the CARES Act. The 60%-of-AGI limit on deductions for CASH donations by individuals who itemize is suspended. You must itemize on Schedule A and does not include excess charitable contributions from prior years.
Taxpayers who do not itemize can deduct up to $300 of charitable CASH contributions “above-the-line” on their tax return for contributions made in 2021. For 2021 only, the per tax return maximum limitation for married taxpayers is suspended. Married taxpayers can deduct $600.
Capital Gains
1. Short-term capital gains are still taxed as ordinary income for investments held less than one year. Since the tax brackets applied to ordinary income since 2018 have changed significantly, your short-term gains are likely taxed at a different rate than they formerly were.
2. Long-term capital gains tax rates rates remain the same (0%, 15% or 20%) depending on filing status and income level. Income thresholds for each rate increase slightly for 2021.
3. The 3.8% net investment income tax rate (Medicare surtax) that applied to high earners remains the same.
Businesses
1. NEW for 2021: Business meals for 2021 and 2022 are 100% deductible to encourage restaurant dining. This includes client meals as well as meals for employees on business travel.
2. Pass through companies (S-Corporations, Partnerships, LLCs and sole proprietors) still receive a 20% deduction of qualified business income. The taxable income limitation thresholds increase in 2021 ($329,800 married/$164,900 single). This deduction is complex and does have certain restrictions for service-type companies (law, accounting, health and financial services), so please contact me if you have specific questions.
3. 100% Bonus Depreciation for the purchase of certain assets that are put into use during the tax year. This deduction is temporary and will last until 2022.
4. Business mileage rate for 2021 has decreased to $0.56 per mile
5. The C-Corporation tax rate remains at a flat 21%.
There are many more small changes to both business and individual taxes, but this blog was intended to educate you on the major changes that effect the majority of taxpayers. If you have any specific examples or items you would like to discuss, please contact me!