A Few Changes to What Is Certain
Below are some of the changes that may affect your 2021 tax returns. A few of the changes noted below are routine, such as the increases in the standard deduction. However, many changes directly result from recent legislation intended to soften the financial impact of the pandemic.
As the great statesman said, “nothing is certain but death and taxes.”And while taxes are certain to impact us all, it is just as certain that they will continually change.
Standard Deduction. Most U.S. taxpayers take the standard deduction. The 2021 standard deduction for all filing statuses increased as follows:
- Single: $12,550 ($150 increase)
- Married filing jointly and surviving spouse: $25,100 ($300 increase)
- Married filing separately: $12,550 ($150 increase)
- Head of household: $18,800 ($150 increase)
- Dependent Standard Deduction (minimum) $1,100 (no change).
The 2021 additional standard deduction for those 65+ or blind is:
- Single: $1,700 ($50 increase)
- Married filing jointly, married filing separately, and surviving spouse: $1,350 ($50 increase)
- Head of household: $1,700 ($50 increase).
For those both 65+ and blind, the above amounts are doubled.
Charitable Contributions. In 2019, you could only deduct charitable contributions if you itemize deductions. However, most Americans did not itemize but, instead, took the standard deduction. Therefore, most individual taxpayers received no tax benefit for their 2019 charitable contributions.
For 2020 tax returns, a small “above the line” benefit was provided for cash contributions to charities if you took the standard deduction. However, under the IRS’s interpretation of the law, this deduction was limited to $300 per return.
But, for 2021, couples who file jointly may now deduct up to $600 on line 12b of form 1040 if you do not itemize your deductions.
Recovery Rebate Credit. Taxpayers received a third round of stimulus money in 2021. The amount received was up to $1,400, plus an additional $1,400 for each eligible dependent. However, some taxpayers did not receive the total amount or, perhaps, anything at all because of adjusted gross income phase-outs.
The amounts paid were considered advance payments based on prior tax information available to the IRS. Unfortunately, many taxpayers received less than they were entitled to, based on their tax situation in previous years. This shortfall can be trued-up on Line 30 of Form 1040.
The good news is that if the IRS overpaid you, you will not have to repay the overpayment, and it will not be taxable. On the other hand, if the IRS underpaid you, you can claim the shortfall credit on Line 30. It’s one of those rare tax situations where you can have your cake and eat it too.
Child Tax Credit. Thanks to the American Rescue Plan Act of 2021, there was a sizeable one-year increase in the child tax credit for 2021. The maximum child tax credit for 2021 is:
- $3,600 for each qualifying child under age six,
- $3,000 for each qualifying child under age 18, but at least age six,
- $500 for any other dependant.
Additionally, the credit is refundable. A refundable credit means you receive a refund even if the credit exceeds your tax liability. However, on the downside, the credit begins to decrease as your income rises. The phase-out starts at adjusted gross incomes of $75,000 for single filers or married filing separately filers, $112,500 for head-of-household filers, and $150,000 for married filing jointly filers.
Half the credit was available to be received in advance monthly in 2021. Taxpayers must reconcile the credit due on Schedule 8812 and Line 28 of Form 1040.
Child and Dependent Care Credit. The American Rescue Plan Act of 2021 also sweetened the pie for the child and dependant care credit. For 2021, the credit is a percentage of qualifying expenses and tops out at $4,000 for one child or disabled person and $8,000 if you have more than one child or disabled person. Phase-out of the credit is based on income level using a somewhat convoluted formula.
Additionally, the credit is refundable, without limits.
Student Loans. For tax years 2018 through 2020, student loan forgiveness could be excluded from gross income only if the forgiveness was due to the student’s death or disability.
However, there is good news for tax years 2021 through 2025. The forgiveness of student loans for any reason will not be a taxable event.
Payroll Taxes. The social security annual wage base increased by $5,100 to $142,800. (The annual wage base rises to $147,000 in 2022.) Medicare tax has no ceiling. The combined tax rate remains at 7.65% on both the employee and the employer.
The medicare surtax remains at 0.9% on 2021 wages and self-employment income. The tax is on employees only (not the employer) on amounts greater than $200,000 for single filers and $250,000 for those filing jointly (or $125,000 for married filing separately.)
Standard Mileage Rates. The standard mileage rate for business use of auto is 56 cents per mile for 2021. It was 57.5 cents in 2020. Deemed depreciation for 2021 is 26 cents per mile.
Many More Changes. The above summarizes just a few of the changes for the 2021 tax year. However, many more impact both your 2021 and 2022 tax returns. Don’t hesitate to contact your tax professional for the details.