Upcoming Tax Law Changes
Even though there is a lot of unknown tax law changes (did you read the Americans Job Plan and American Families plan?), there are some changes that we do know about. This is not an all-inclusive list but is some of the most popular.
Child Tax Credit: The child tax credit jumps to $3,600 for children 5 years or younger, and $3,000 for most children. This is a $1,000 increase. Another change is the credit is fully refundable.
Child Dependent Credit: The child and dependent care credit is fully refundable. The maximum child dependent care credit increased as well. It went up from 35% to 50%. More of the care expenses is available for the credit, $8,000 of your care expenses ($16,000 for more than one child). This puts the top credit at $4,000 for one child and $8,000 for two or more.
Tax Bracket Ranges: The tax rates didn’t change but the income tax brackets expanded due to inflation.
Retirement Plans: Required Minimum Distributions (RMDs) are back for 2021. The contribution levels for traditional IRAs and Roth IRAs stay the same at $6,000 with a $1,000 catch-up contribution for individuals aged 50 and up. However, the income ceiling for ROTH IRA contributions did go up. They now phase out at an Adjusted Gross Income (AGI) of $208,000 for married (was $198,000) and $140,000 for singles (was $125,000). The deduction phase-out also changes. It is now at $125,000 for couples (up from $105,000) and $75,000 for single individuals (up from $65,000).
Long-Term Capital Gains Tax Rates: Hot topic at the moment. Yes, President Biden wants to raise long-term capital gains on anyone who has an AGI of more than $1 million ($500,000 for Married Filing Separately) to be taxed at ordinary income tax rates, but currently the rates did not change for 2021. The income thresholds to qualify were adjusted for inflation.
Standard Deduction: This has increased in 2021 for inflation. The new standard deduction is $25,100 for married and $12,550 for singles.
Charitable Donations: The above the line deduction for $300 was extended to 2021. However, in 2021 married couples now get $600 on a joint tax return. The suspension of the 60% AGI limit on the deduction for cash donations was also extended to 2021.
Student Loan Canceled or Forgiven: Normally when a debt is canceled or forgiven, it creates taxable income in the amount of the debit forgiven or canceled. However, starting in 2021, this rule is suspended. The change is only temporary. In 2026, forgiven or canceled student debt will be taxed. Also, the ability for employees to exclude $5,250 of college loans paid by their employer from their wages was extended through 2025.
Adoption Credit: The credit increased from $14,300 to $14,440.
Estate and Gift Tax: The lifetime estate and gift tax exemption for 2020 jumped from $11.58 million to $11.17 million ($23.4 million for couples if portability is elected by timely filing). Estate tax is still at 40%.
Education Credits: Tuition and fees deduction was repealed beginning in 2021. This was a loss of a $4,000 above the line write-off. To offset this, the phase-out thresholds for lifetime learning credit were increased.
Americans working abroad: The income exclusion increased from $107,600 to $108,700.
Payroll Taxes: The Social Security wage base increased by $5,100 to $142,800.
Standard Mileage Rates: These went down. Business miles is now at $0.56 per mile; medical is at $0.16 per mile, charitable miles stayed the same at $0.14 per mile.
Health Savings Account: The contributions rose from $7,100 to $7,200 for a family and $3,550 to $3,600 for self only.
With all the tax law changes in 2021, and the ones we do not yet know, start to tax plan now!
As soon as we know more about President Biden's proposed tax plan increases we will write a blog on those.