Throughout the 2021 year, there were various tax law changes and updates made with some of those being due to the economic environment created during the pandemic. This blog organized by the BerganKDV tax team outlines key changes made. Please note that the information in this post takes into account the current law changes and updates, including COVID-relief legislation that was signed into law last December and March. Our team understands that there are conversations happening in Washington D.C. that may make retroactive or new changes to the below information. Updates will be provided by our team when and if those updates occur.
Child Tax Credit
There are big changes for the 2021 child tax credit and as of this writing, they are only temporary and scheduled to impact 2021 tax returns only. For 2021 returns, the changes involve the following:
- An increase to the per-child credit amount from $2,000 to $3,000/$3,600;
- The extra 2021 credit amount begins to phase-out at different levels of income vs. when the phase-out begins for the $2,000 per child credit that is equal to the 2020 amount;
- The 2021 credit is fully refundable;
- Children who are age 17 qualify for the 2021 credit.
- Half of the 2021 credit is being paid in advance through monthly payments that started on July 15 and will end on December 15. The other half of the credit will be claimed on the 2021 tax return.
BerganKDV’s previous blog article goes into more detail about the 2021 changes to the child tax credit.
Child & Dependent Care Credit
Like the child tax credit referred to above, the changes impacting the child & dependent care credit are currently temporary and only apply to the 2021 tax year.
The 2020 credit was non-refundable. It 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 amount of the credit started at 35% of eligible expenses but decreased to 20% as income exceeded $15,000. Maximum qualifying expenditures were up to $3,000 for one child/disabled person or $6,000 for two or more.
For 2021, the credit is fully refundable. The maximum credit percentage increases to 50% from 35%. The phase-out structure is changed so that instead of the decrease starting at $15,000, it will not begin to be reduced until adjusted gross income reaches $125,000. The percentage is gradually reduced from 50% to 20% for people with an income between $125,001 and $183,001. It stays at 20% for families with an income from $183,001 to $400,000, but then is gradually reduced again from 20% to 0% for taxpayers with an income above $400,000, with it being fully phased-out when income is above $438,000. More expenditures qualify in 2021. The credit is allowed for up to $8,000 in expenses for one child/person who is disabled and $16,000 for more than one.
Recovery Rebate Credit
The third round of stimulus payments received earlier this year will have to be reconciled on the 2021 tax return. The checks were to be $1,400 ($2,800 for taxpayer and spouse) plus an additional $1,400 for each dependent. Payments began to be phased out for joint filers with incomes above $150,000, head-of-household filers with income above $112,500, and single filers with income above $75,000.
Technically this stimulus payment was an advance payment of the recovery rebate credit that will be reconciled on your 2021 return. If your stimulus payment was less than the credit amount you are eligible for, you will receive a credit for the difference. If the stimulus payment was more than the credit amount you are eligible for, you will not have to pay the difference back to the IRS.
The stimulus payments are not taxable.
Required Minimum Distributions (RMDs)
In 2020, taxpayers were eligible to skip their RMDs without paying a penalty. The RMD suspension only applied for that year. Anyone who is at least 72 years old by the end of 2021 is required to take an RMD for 2021.
Charitable Gift Deductions
In 2020, a new “above-the-line” deduction was allowed for up to $300 of charitable cash contributions. This was only allowed for individuals who claimed the standard deduction on their tax return. Married couples filing jointly were only allowed a $300 deduction.
This has been extended to 2021, with one change. The $300 deduction is now allowed per person meaning that married couples can deduct up to $600 on a joint 2021 return.
Like 2020, in 2021 taxpayers who itemize their deductions may deduct certain charitable contributions up to 100% of their adjusted gross income.
Estate & Gift Taxes
The lifetime estate and gift exemption for 2021 is $11.7 million – $23.4 million for couples if portability is elected. The estate tax rate remains 40%.
The annual gift tax exclusion remains $15,000 per recipient. This means that gifts of up to $15,000 ($30,000 if each spouse agrees) to someone in 2021 without having to file a gift tax return or use your lifetime estate and gift exemption.
LTCG Rates for 2021
The 3.8% net investment income tax starts for single filers at the modified adjusted gross income of $200,000 and $250,000 for joint filers.
The standard deduction is $1,300 higher for those who are over 65 or blind. It’s $1,700 higher if also unmarried and not a surviving spouse.
The 2021 Social Security wage base is $142,800 for 2021 (vs. $137,700 in 2020). The 0.9% Medicare surtax is paid by employees on their wages and self-employment income above $200,000 for singles taxpayers and $250,000 for those filing jointly.
Standard Mileage Rate
The 2021 standard mileage rate is 56¢ a mile vs. 57.5¢ in 2020. The charitable driving rate stayed at 14¢ a mile.
Health Savings Accounts (HSA)
Flexible Spending Accounts (FSA)
Employers can modify their FSA plans to allow an employee’s unused funds from 2020 to be used in 2021 and unused funds from 2021 to be used in 2022.
Alternatively, employers can extend the grace period for using FSA funds after the end of the year. Instead of the grace period being 2 ½ months (i.e. to March 15), a grace period of up to 12 months is allowed for using 2020 and 2021 FSA funds.
More can be contributed to a dependent care FSA in 2021. Instead of the $5,000-per-year limit on tax-free contributions, that amount can be $10,500.
- Business meals (provided by a restaurant) deduction for 2021 is increased from 50% to 100% for 2021 and 2022
- The $250,000 cap on deductible business losses ($500,000 for married filing joint) can affect 2021 returns after being suspended for the 2018-2020 tax years.
If you have questions about how the above changes and updates impact your tax planning strategy, BerganKDV can help. Contact us and one of our professionals will be happy to assist you with your tax planning needs.