2021 Tax Update

As in prior years, we are incorporating our tax update as part of our website instead of a separate mailing.
 
Last year, we discussed The CARES Act that was passed in 2020 as it had many provisions that impacted your tax return.  There were additional stimulus laws passed in 2021.  Under the CARES Act, most Americans received a stimulus check in 2020 for $1,200 ($2,400 for couples filing jointly), plus $500 for each child under age 17.  These amounts were phased out for joint filers with adjusted gross income above $150,000 or single filers with adjusted gross income about $75,000.
 
A second round of stimulus checks ($600 per person; $1,200 per couple filing jointly; $600 per child under the age of 17) was approved in late December.  Stimulus payments were sent out beginning late December and continued being sent out until January 15, 2021.
 
The first two stimulus payments were reconciled on your 2020 return.  The third round of stimulus checks ($1,400 for singles and household heads; $2,800 for joint filers; plus $1,400 more for each dependent) went out in 2021.  These amounts will be reconciled on your 2021 tax return.
 
Technically, your stimulus checks were an advance payment of a special 2020 and 2021 tax credit known as the recovery rebate credit.  When you file your 2021 tax return, you will have to reconcile the third stimulus check you received with the recovery rebate credit you are entitled to claim for the third stimulus.  If the stimulus payment received is less than your credit amount, you will receive an additional refundable tax credit equal to the difference.  If your stimulus check was more than your credit amount, you will not have to repay the difference to the IRS in most cases.  Also, the Stimulus payments are not taxable.
 
Here are some of the highlights of the legislation passed recently that will impact your 2021 return:
  • REVAMPED CHILD CREDIT –  The $2,000-per-child credit rises to $3,000 ($3,600 for children under age 6).  Children 17 and under qualify.  The credit is fully refundable and the IRS is required to pay 50% of it in advance to qualifying families.  There is a phaseout for single taxpayers with AGI exceeding $75,000 ($150,000 for joint filers).  The credit due and the advance payments will be reconciled when you file your 2021 tax return.
  • INCREASED DEPENDENT CARE CREDIT – For 2021, the dependent care credit has been increased to $4,000 for one child and $8,000 for two or more children.  The credit begins to phaseout for taxpayers with AGI in excess of $125,000.
  • ABOVE-THE-LINE-DEDUCTION FOR COLLEGE TUITION ELIMINATED – This deduction has been eliminated, but the income phaseout limits for the Lifetime Learning credit have been increased.
  • BUSINESS MEALS- Businesses can deduct 100% of business meals if the food is provided by a restaurant.  This change applies to 2021 and 2022.
  • 2021 AND 2022 401(k) AND IRA CONTRIBUTION LIMITS – The maximum 401(k) contribution for 2021 is $19,500 ($20,500 for 2022) plus an allowable catch-up contribution of $6,500 for those age 50 and up.  The maximum IRA contribution for 2021 and 2022 is $6,000 plus an allowable catch-up contribution of $1,000 for those age 50 and up.
  • CHARITABLE DEDUCTION FOR NONITEMIZERS –.Itemizers can write off up to $300 of charitable cash contributions ($600 for joint filers).
  • SOCIAL SECURITY AND SELF-EMPLOYMENT TAX DEFERRAL - The CARES ACT lets employers defer payment of the Social Security taxes they owe on wages paid from March 27 through December 31, 2020.  Self-employed people can defer 50% of their self-employment tax.  Half the deferred self-employment tax must be repaid on or before December 31, 2021, with the remaining balance due on or  before December 31, 2022.  
SOME TAX BREAKS THAT WERE SET TO EXPIRE AFTER 2000 WERE EXTENDED:
 
  • Exclusion from gross income of discharge of qualified principal residence indebtedness was retroactively extended to discharges of indebtedness before January 1, 2026.
  • The treatment of mortgage insurance premiums as qualified residence interest (subject to a phaseout) was extended through 2021 for amounts paid or incurred after Dec 31, 2017.
  • The code provides that, individuals, for 2017 and 2018, could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses  exceeded 7.5% of AGI.  The Disaster Act extends this threshold of 7.5% for tax years beginning after Dec. 31, 2018 and before Jan. 1, 2021.  Recent legislation has now made the  7.5% threshold permanent.
Taxpayers with financial interests outside of the USA, must be careful to follow the somewhat intricate tax reporting rules with respect to these investments and holdings.  A person with a financial interest in or signature authority over one or more accounts in a foreign country has historically filed, at the very least, a FinCEN 114 form if the aggregate value of all foreign accounts exceeded $10,000 at any time during the year.  This was commonly referred to as an FBAR and was due on or before June 30 for the previous calendar year.  Beginning with tax year 2016, the FBAR is now due April 15 for the previous calendar year.  So the FBAR for 2021 is due April 15, 2022 and it must be filed electronically.  The initial due date can be extended for a six month period to October 15, 2022.  For larger foreign account balances and certain foreign trust accounts, there are additional forms that need to be filed, some of which need to be attached to your current federal income tax return.  The penalty for failure to file these forms or make the appropriate disclosures are very large, so be sure that you are very careful in this area.  Be sure to let us know of any foreign accounts that you have regardless of whether they generate any income when you send in your tax information.
 
As State tax rates have continued to rise, taxpayers owning multiple homes have explored changing their residence for tax purposes to reduce their state tax liability.  The states are getting more aggressive in challenging taxpayers who don’t follow all the rules to effectively change their tax residence.  Please call our office if you are considering changing your residence for tax purposes.
 
If you have any questions or feel some of these changes impact you, please do not hesitate to call our office.