Personal exemptions are eliminated for tax years 2018 through 2025.
The standard deduction for married couples filing a joint return in 2021 is $25,100. For singles and married individuals filing separately, it is $12,550, and for heads of household, the deduction is $18,800.
The additional standard deduction for blind people and senior citizens in 2021 is $1,350 for married individuals and $1,700 for singles and heads of households.
Income Tax Rates
In 2021 the top tax rate of 37 percent affects individuals whose income exceeds $518,400 ($628,300 for married taxpayers filing a joint return). Marginal tax rates for 2021 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. As a reminder, while the tax rate structure remained similar to prior years under tax reform (i.e., with seven tax brackets), the tax-bracket thresholds increased significantly for each filing status.
Estate and Gift Taxes
In 2021 there is an exemption of $11.70 million per individual for estate, gift, and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $15,000.
Alternative Minimum Tax (AMT)
For 2021, exemption amounts increased to $73,600 for single and head of household filers, $114,600 for married people filing jointly and for qualifying widows or widowers, and $57,300 for married taxpayers filing separately.
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been eliminated under TCJA.
Flexible Spending Account (FSA)
A Flexible Spending Account (FSA) is limited to $2,750 per year in 2021 (same as 2020) and applies only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Long-Term Capital Gains
In 2021 tax rates on capital gains and dividends remain the same as 2020 rates (0%, 15%, and a top rate of 20%); however, taxpayers should be reminded that threshold amounts don’t correspond to the tax bracket rate structure as they have in the past. For example, taxpayers whose income is below $40,400 for single filers and $80,800 for married filing jointly pay 0% capital gains tax. For individuals whose income is at or above $445,850 ($501,600 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Miscellaneous deductions that exceed 2 percent of AGI (adjusted gross income) are eliminated for tax years 2018 through 2025. As such, you can no longer deduct on Schedule A expenses related to tax preparation, moving (except for members of the Armed Forces on active duty who move because of a military order), job hunting, or unreimbursed employee expenses such as tools, supplies, required uniforms, travel, and mileage.
Business owners are not affected and can still deduct business-related expenses on Schedule C.
Individuals – Tax Credits
In 2021 a nonrefundable (i.e., only those with tax liability will benefit) credit of up to $14,440 is available for qualified adoption expenses for each eligible child.
Child and Dependent Care Credit
The Child and Dependent Care Tax Credit was permanently extended for taxable years starting in 2013 and remained under tax reform. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit. For 2021, the American Rescue Plan Act of 2021, enacted March 11, 2021, made the credit substantially more generous (up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons) and potentially refundable, so you might not have to owe taxes to claim the credit (so long as you meet the other requirements).
More taxpayers will be eligible for the credit for the first time and that, for many taxpayers, the amount of the credit will be larger than in prior years. Taxpayers with an adjusted gross income over $438,000, however, are not eligible for this credit even though they may have previously been able to claim the credit.
Child Tax Credit and Credit for Other Dependents
For the tax year 2021, the Child Tax Credit is increased from $2,000 per qualifying child to $3,600 for children ages 5 and under at the end of 2021 and $3,000 for children ages 6 through 17 at the end of 2021. The Child Tax Credit is fully refundable in 2021. Even if taxpayers do not owe any tax, they can still claim the credit.
Families that received Advanced Child Tax Credit payments will need to reconcile these amounts when filing their 2021 tax returns in 2022. Families generally received about one-half of their tax credit through these advance payments.
The Credit for Other Dependents is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit did not change in 2021 and is nonrefundable. It also covers children older than age 17 and parents or other qualifying relatives supported by a taxpayer.
Earned Income Tax Credit (EITC)
For the tax year 2021, the maximum earned income tax credit (EITC) for low, and moderate-income workers and working families increased to $6,728 (up from $6,660 in 2020). For taxpayers with no qualifying children, the maximum credit is $543.
The maximum income limit (three or more qualifying children) for the EITC increased to $57,414 (up from $56,844 in 2020) for married filing jointly and $51,464 for taxpayers whose filing status is single or head of household. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Individuals – Education Expenses
Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2021. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.
American Opportunity Tax Credit and Lifetime Learning Credit
The maximum credit is $2,500 per student for the American Opportunity Tax Credit. The Lifetime Learning Credit remains at $2,000 per return. To claim the full credit for either, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
Employer-Provided Educational Assistance
As an employee in 2021, you can exclude up to $5,250 of qualifying postsecondary and graduate education expenses that are reimbursed by your employer.
Student Loan Interest
In 2021, you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $70,000 (single) or $140,000 (married filing jointly). The credit cannot be claimed if your modified adjusted gross income (MAGI) is more than $85,000 for single filers ($170,000 if married filing jointly).
Individuals – Retirement
For 2021, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,500 (same as 2020). For persons age 50 or older in 2021, the limit is $26,000 ($6,500 catch-up contribution).
Retirement Savings Contributions Credit (Saver’s Credit)
In 2021, the adjusted gross income limit for the saver’s credit for low and moderate-income workers is $66,000 for married couples filing jointly, $49,500 for heads of household, and $33,000 for married individuals filing separately and for singles. The maximum credit amount is $2,000 ($4,000 if married filing jointly). As a reminder, starting in 2018, the Saver’s Credit can be taken for your contributions to an ABLE (Achieving a Better Life Experience) account if you’re the designated beneficiary. However, keep in mind that your eligible contributions may be reduced by any recent distributions you received from your ABLE account.
If you have any questions about these and other tax provisions that could affect your tax situation, don’t hesitate to call.