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12 Tax Changes for 2021

January 14, 2021

January 2021 is not only the start of a new year, but it also means it’s officially tax season! Hoffmaster CPA is expecting another busy year, especially due to the federal COVID-19 Economic Relief Bill passed by Congress in December 2020 and the new tax laws planned for 2021.

I subscribe to The Kiplinger Tax Letter, a biweekly e-newsletter providing personal finance advice, analysis and business forecasts to tax professionals, and the first issue of 2021 discusses the new tax changes and information taxpayers need to know.

Here are 12 economic and tax relief changes planned for 2021 mentioned in The Kiplinger Tax Letter:

1. Second round of stimulus checks

Individuals with adjusted gross incomes (AGIs) of less than $75,000 will receive $600 payments, while married joint filers with an AGI of up to $150,000 are eligible to receive a total of $1,200. Individuals with children under the age of 17 will also receive $600 for each qualifying child. The IRS must send payments by January 15. If you haven’t received your check, but you are eligible, you can claim the credit when you file your 2020 return.

2. Businesses can deduct business meals in 2021 and 2022

In an effort to encourage more restaurant dining, Congress is allowing businesses to deduct 100 percent of business meals, including client meals and meals for employees on business travel.

3. Standard mileage rate decreases for business driving

The IRS changed the 2021 standard mileage rates to 56 cents per mile driven for business (down 1.5 cents from the 2020 rate), 16 cents per mile driven for medical or moving purposes for qualified active duty members of the Armed Forces and 14 cents per mile driven in service of charitable organizations.

4. The annual cap on deductible contributions to Health Savings Accounts rises in 2021

Health Savings Account contribution limits for self-only coverage is $3,600 and $7,200 for family coverage. If you’re born before 1967, you can contribute an additional $1000.

5. 2021 income tax brackets and standard deduction

This year, tax brackets increased slightly for all filing statuses to adjust for inflation with the highest tax rate set at 37 percent.

The standard deduction reduces your taxable income and for the 2020 tax year (which will be filed in 2021), the standard deduction for married couples is $25,100 with each spouse age 65 or older allowed an additional $1,350. Single filers can claim $12,550 with individuals age 65 or older getting $14,250 and household heads get $18,800 plus $1,700 once they reach age 65.

6. Extended tax breaks

Some existing tax breaks have been extended permanently, until 2025 or for one year.

Permanently extended:

  • The deduction threshold to deduct your medical expenses will remain at 7.5 percent of individuals’ AGI.
  • The Energy-Efficient Commercial Buildings deduction for energy-efficient improvements made to commercial buildings.
  • The above-the-line tuition write off for parents of college children ended in 2020, but lawmakers expanded the lifetime learning credit by making it available to higher income taxpayers. Couples with AGIs of $160,000 and individuals with AGIs of $80,000 now qualify for the credit.

Extended through 2025:

  • The new markets and work opportunity tax credits.
  • Employers can pay and exclude up to $5,250 of college debt from workers’ wages.
  • Tax credit for employers that provide paid family and medical leave to workers. (Additionally, the payroll credit for mandated sick and family leave paid by firms to employees affected by COVID-19 goes through March 31, 2021).
  • The tax break for homeowners who jointly file and had a mortgage balance forgiven was reduced from $2 million to $750,000 ($350,000 for single filers).

Extended through 2021:

  • Deduction for mortgage insurance premiums.
  • Nonbusiness energy property credit.
  • Nonitemizers can write off up to $300 in charitable cash contributions with married couples filing jointly able to deduct $600.

7. Paycheck Protection Program loans

Debt forgiveness is not taxable, and businesses can deduct expenses that result in forgiveness of their Paycheck Protection Program (PPP) loans. Additionally, Congress has extended the PPP program by providing more funding, adjusting loan eligibility and simplifying the forgiveness process for loan amounts up to $150,000.

8. Employee Retention Tax Credit

The credit has been extended from January 1 to June 30, 2021 and has expanded to include an increase in the credit rate to 70 percent of up to $10,000 of qualified wages paid, per employee, per quarter, resulting in a maximum credit of $7,000 per worker, per quarter.

9. Workers have more time to pay back deferred employee payroll taxes

Last year, employers had the option to defer the withholding, deposit and payment of a worker’s Social Security tax from Sept. 1 to Dec. 31, 2020. Employers who deferred these taxes then had to take additional withholding from employee paychecks from Jan. to April 2021, but the new law extends repayment of these deferred taxes through Dec. 31, 2021.

10. Tax Rates on long-term capital gains and qualified dividends do not change, but income thresholds increase

Tax rates on long-term capital gains and qualified dividends remain at 0 percent, 15 percent or 20 percent, but the income thresholds to qualify for various rates go up for 2021.

The 0 percent rate applies for individual taxpayers with taxable income up to $40,400, head-of-household filers with income up to $54,100 and married joint filers with income up to $80,800.

The 20 percent rate is for individual taxpayers with taxable income up to $445,851, head-of-household filers with income up to $473,751 and married joint filers with income up to $501,601. The 15 percent rate is for filers with taxable incomes between 0 percent and 20 percent break points.

11. Estate and gift tax

This year, the gift tax exclusion will remain at $15,000. You can give up to $15,000 to someone in 2021 without having to file a gift tax return or tap your lifetime estate and gift tax exemption. In 2021, the lifetime estate and gift tax exemption jumps to $11.7 million for individuals and $23.4 million for couples.

12. A key dollar threshold on the 20 percent deduction for pass-through income rises in 2021

Individuals who are self-employed and owners of LLCs, S corporations and other pass-throughs can deduct 20 percent of their qualified business income, subject to limitations for individuals with taxable incomes of more than $329,800 for joint filers and $164,900 for singles.

It’s not too early to contact Anthony Hoffmaster, CPA, CES, MST, about preparing and filing your 2020 taxes. You can reach him by phone 919-435-4413 or email.

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