Tax Changes for the 2021 Tax Year
Here is a list of some important tax law changes and adjustments for 2021 (CalCPA and Kiplinger)
Child Tax Credit
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.
For 2021, it jumps from $2,000 to $3,000 for most children. For families with higher incomes, 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.
Although these enhancements only apply for the 2021 tax year, President Biden wants to extend most of them through 2025 and make the credit fully refundable on a permanent basis. However, whether that effort is ultimately successful remains to be seen.
Child and Dependent Care Tax Credit
The American Rescue Plan made significantimprovements to the child and dependent care credit. But, again, the changesonly apply to the 2021 tax year (although President Biden wants to make theenhancements permanent).
For 2021, the child and dependent care creditis 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. Some qualifications required, ex. Filing jointly tax returns, both parents must have earned income.
Tax Bracket Ranges
Although the tax rates didn't change, the income tax brackets for 2021 are slightly wider. Note that President Biden wants to increase the top tax rate to 39.6% beginning in 2022. This rate would apply to taxable income over $452,700 for single taxpayers, $481,000 for head of household filers, and $509,300 for married couples filing a joint return. After 2022, the thresholds would be adjusted for inflation as usual.
Long-Term Capital Gains Tax Rates
Tax rates on long-term capital gains (i.e., gains from the sale of capital assets held for at least one year) and qualified dividends did not change for 2021. However, the income thresholds to qualifyfor the various rates were adjusted for inflation.
In 2021, the 0% rate applies for individual taxpayers with taxable income up to $40,400 on single returns ($40,000 for2020), $54,100 for head-of-household filers ($53,600 for 2020) and $80,800 for joint returns ($80,000 for 2020).
The 20% rate for 2021 starts at $445,851 for singles ($441,451 for 2020), $473,751 for heads of household ($469,051 for2020) and $501,601 for couples filing jointly ($496,601 for 2020).
The 15% rate is for filers with taxable incomes between the 0% and 20% break points.
The 3.8% surtax on net investment income stays the same for 2021. It kicks in for single people with modified AGI over$200,000 and for joint filers with modified AGI over $250,000.
Note that President Biden wants long-term capital gains of anyone with an AGI of more than $1 million to be taxed at the ordinary income tax rates to the extent the person's income exceeds $1 million ($500,000 for a married person filing a separate tax return).
Americans Working Abroad
U.S. taxpayers working abroad have a larger income exclusion in 2021. It jumped from $107,600 for 2020 to $108,700 for2021.
The standard ceiling on the foreign housing exclusion is also increased from $15,064 to $15,218 for 2021 (although overseas workers in many high-cost locations around the world qualify for a significantly higher exclusion).
Payroll Taxes
The Social Security annual wage base is $142,800 for 2021 (that's a $5,100 hike from 2020). The Social Security tax rate on employers and employees stays at 6.2%. Both workers and employers continue to pay the 1.45% Medicare tax on all compensation in 2021, with no cap. Workers also pay the 0.9% Medicare surtax on 2021 wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn't hit employers, though.
In August 2020, President Trump issued anexecutive memorandum allowing employers to suspend the collection and paymentof Social Security payroll taxes from September 1 until the end of 2020 for workers making less than $4,000 for any bi-weekly pay period (i.e., $2,000 per week, or $104,000 per year). The president's action didn't eliminate the tax debt — it just delayed withholding and payment of the tax — and it was optional. If your employer suspended payroll taxes in 2020, it must collect the deferred taxes from your paycheck by December 31, 2021. So, during 2021, some workers will have more withheld from their paychecks for the 6.2% Social Security tax.
The nanny tax threshold went up to $2,300 for2021, which was a $100 increase from 2020.
Health Savings Accounts (HSAs)
The annual cap on deductible contributions to health savings accounts (HSAs) rose in 2021 from $3,550 to $3,600 for self-only coverage and from $7,100 to $7,200 for family coverage. People born before 1967 can put in $1,000 more (same as for 2020).
Qualifying insurance policies must limitout-of-pocket costs in 2021 to $14,000 for family health plans ($13,800 in2020) and $7,000 for people with individual coverage ($6,900 in 2019). Minimum policy deductibles remain at $2,800 for families and $1,400 for individuals.
Alternative Minimum Tax (AMT)
There's good news for anyone worried about getting hit with the alternative minimum tax: AMT exemptions ticked upward for2021. They increased from $113,400 to $114,600 for couples and from $72,900 to $73,600 for single filers and heads of household. The phaseout zones for the exemptions start at higher income levels as well — $1,047,200 for couples and $523,600 for singles and household heads ($1,036,800 and $518,400, respectively, for 2020).
In addition, the 28% AMT tax rate kicked in abit higher in 2021 — above $199,900 of alternative minimum taxable income. Therate applied to AMTI over $197,900 for 2020.
Self-Employed People
If you're self-employed, there are some additional 2021 tax law changes that could impact your bottom line. For example, a key dollar threshold on the 20% deduction for pass-through income was increased for 2021. Self-employed people and owners of LLCs, S corporations and other pass-through entities candeduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes in excess of $329,800 for joint filers and $164,900 for others ($326,600 and $163,300, respectively, for 2020).
In addition, tax credits that were allowed in 2020 for self-employed people who couldn't work for a reason that would have entitled them to pandemic-related sick or family leave if they were an employee have been extended to cover leave through September 30, 2021. The number of days for which self-employed people can claim the credit for family leave was also increased from 50 to 60, and the 10-day limit on the maximum number of days for which a self-employed person can claim the sick leave credit was reset to begin again on January 1, 2021. Other changes that self-employed Americans need to know about include:
The deduction for business meals is increased from 50% to 100% for 2021 and 2022;
Self-employment taxes cannot be deferred in 2021 as they were in 2020;
The $250K cap on deductible business losses ($500K for joint filers) is back in play after being suspended for the 2018 to 2020 tax years.
(For details please refer to the IRS and FTB website)
