Candace J. Dixon
The Internal Revenue Service announced the tax year 2021 annual inflation adjustments, including the tax rate schedules and other tax changes. Revenue Procedure 2020-45 has details about these annual adjustments. These 2021 inflation amounts were announced in late 2020. Some amounts were changed by the American Rescue Plan Act of 2021. The IRS issued a Revenue Procedure listing the amounts from Rev Proc 2020-45 and Rev Proc 2020-36 that have been replaced by ARPA.
Highlights of changes in Revenue Procedure 2020-45
The Consolidated Appropriation Act for 2020 increased the amount of the minimum addition tax for failure to file a tax return within 60 days of the due date. Beginning with returns due after Dec. 31, 2019, the new additional tax is $435 or 100 percent of the amount of tax due, whichever is less, an increase from $330. The $435 additional tax will be adjusted for inflation.
The tax year 2021 adjustments described below generally apply to tax returns filed in 2022.
The tax items for tax year 2021 of greatest interest to most taxpayers include the following dollar amounts:
2021 Standard Deductions and Exemptions
The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
The personal exemption for tax year 2021 remains at 0, as it was for 2020; this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
2021 Federal Tax Brackets
Marginal Rates: For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:
35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
32% for incomes over $164,925 ($329,850 for married couples filing jointly);
24% for incomes over $86,375 ($172,750 for married couples filing jointly);
22% for incomes over $40,525 ($81,050 for married couples filing jointly);
12% for incomes over $9,950 ($19,900 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
2021 Capital Gains Tax Rates (Long-Term Capital Gains)
For the 2021 tax year, the tax rates are the same, while the brackets increased.
2021 Alternative Minimum Tax
The exemption amount for tax year 2021 is $73,600 and begins to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200). The 2020 exemption amount was $72,900 and began to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption began to phase out at $1,036,800).
2021 Estate Tax Exemption
Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000, up from a total of $11,580,000 for estates of decedents who died in 2020.
2021 Annual Gift Tax Exclusion
The annual exclusion for gifts is $15,000 for calendar year 2021, as it was for calendar year 2020.
For tax years beginning in 2021, § 6039F authorizes the Treasury Department and the Internal Revenue Service to require recipients of gifts from certain foreign persons to report these gifts if the aggregate value of gifts received in the tax year exceeds $16,815. (added May 17, 2021)
2021 Foreign Earned Income Exclusion
Is $108,700 up from $107,600 for tax year 2020.
2021 Itemized Deductions
For 2021, as in 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
2021 Earned Income Credit
Childless EITC expanded for 2021
For 2021 only, more childless workers and couples can qualify for the Earned Income Tax Credit (EITC), a fully refundable tax benefit, because the maximum credit is nearly tripled and is, for the first time, available to both younger workers and senior citizens.
In 2021, the maximum EITC for those with no dependents is $1,502, up from $538 in 2020. Available to filers with an AGI below $27,380 in 2021, it can be claimed by eligible workers who are at least 19 years of age. Full-time students under age 24 don't qualify. In the past, the EITC for those with no dependents was only available to people ages 25 to 64.
Another change is available to both childless workers and families with dependents. For 2021, it allows them to choose to figure the EITC using their 2019 income, as long as it was higher than their 2021 income. In some instances, this option will give them a larger credit.
Changes expanding EITC for 2021 and future years
Singles and couples who have Social Security numbers can claim the credit, even if their children don't have SSNs. In this instance, they would get the smaller credit available to childless workers. In the past, these filers didn't qualify for the credit
More workers and working families who also have investment income can get the credit. Starting in 2021, the limit on investment income is increased to $10,000. After 2021, the $10,000 limit is indexed for inflation. The current limit is $3,650.
Married but Separated spouses can choose to be treated as not married for EITC purposes. To qualify, the spouse claiming the credit cannot file jointly with the other spouse, cannot have the same principal residence as the other spouse for at least six months out of the year and must have a qualifying child living with them for more than half the year.
2021 monthly limitation for the qualified transportation fringe benefit
Remains $270, as is the monthly limitation for qualified parking.
2021 dollar limitation for employee salary reductions for contributions to health flexible spending arrangements
Remains $2,750. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $550, an increase of $50 from taxable years beginning in 2020.
For tax year 2021, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,400, up $50 from tax year 2020; but not more than $3,600, an increase of $50 from tax year 2020. For self-only coverage, the maximum out-of-pocket expense amount is $4,800, up $50 from 2020. For tax year 2021, participants with family coverage, the floor for the annual deductible is $4,800, up from $4,750 in 2020; however, the deductible cannot be more than $7,150, up $50 from the limit for tax year 2020. For family coverage, the out-of-pocket expense limit is $8,750 for tax year 2021, an increase of $100 from tax year 2020.
2021 Lifetime Learning Credit
the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $119,000, up from $118,000 for tax year 2020.
2021 Maximum Credit Allowed for Adoptions
Is the amount of qualified adoption expenses up to $14,440, up from $14,300 for 2020.
Tax provisions in American Rescue Plan - 2021 tax season
Child and dependent care credit increased for 2021 only
The new law increases the amount of the credit and eligible expenses for child and dependent care, modifies the phase-out of the credit for higher earners and makes it refundable.
For 2021, the top credit percentage of qualifying expenses increased from 35% to 50%.
Eligible families can claim qualifying child and dependent care expenses of up to:
$8,000 for one qualifying individual, up from $3,000 in prior years, or
$16,000 for two or more qualifying individuals, up from $6,000 before 2021.
The maximum credit in 2021 of 50% for one dependent's qualifying expenses is $4,000, or $8,000 for two or more dependents.
When figuring the credit, employer-provided dependent care benefits, such as those provided through a flexible spending account (FSA), must be subtracted from total eligible expenses.
Under the new law, more people will qualify for the new maximum 50% credit rate because the adjusted gross income (AGI) level at which the credit percentage is reduced is raised from $15,000 to $125,000.
Above $125,000, the 50% credit percentage is reduced as income rises, plateauing at a 20% rate for taxpayers with an AGI above $183,000. The credit percentage level remains at 20% until reaching $400,000 and is then phased out above that level. It is completely unavailable for any taxpayer with AGI exceeding $438,000.
In 2021, for the first time, the credit is fully refundable. An eligible family can get it, even if they owe no federal income tax.
Workers can set aside more in a Dependent Care FSA
For 2021, the maximum amount of tax-free employer-provided dependent care benefits increased from $5,000 to $10,500. This means that an employee can set aside $10,500 in a dependent care FSA, if their employer has one, instead of the normal $5,000.Workers can only do that if their employer adopts this change. Interested employees should contact their employer for details.
Expanded Child Tax Credit for 2021 only
The new law increases the amount of the Child Tax Credit, makes it available for 17-year-old dependents, makes it fully refundable and makes it possible for families to receive up to half of it, in advance, during the last half of 2021. Families can get the credit even if they have little or no income.
Prior to taxable year 2021, the credit is worth up to $2,000 per eligible child. The new law increases it to as much as $3,000 per child for dependents ages 6 through 17, and $3,600 for dependents ages 5 and under.
The maximum credit is available to taxpayers with a modified AGI of:
$75,000 or less for singles,
$112,500 or less for heads of household and
$150,000 or less for married couples filing a joint return and qualified widows and widowers.
Above these income thresholds, the extra amount above the original $2,000 credit — either $1,000 or $1,600 per child — is reduced by $50 for every $1,000 in modified AGI.
The credit is fully refundable for 2021. Before this year, the refundable portion was limited to $1,400 per child.
Advance Child Tax Credit Payments in 2021:
From July through December 2021, up to half the credit will be advanced to eligible families by Treasury and the IRS. The advance payments will be estimated from their 2020 return, or if not available, their 2019 return.
Half the total credit amount is being paid in advance monthly payments.
You claim the other half when you file your 2021 income tax return.
Who Qualifies for Advance Payments:
To qualify for advance payments of the Child Tax Credit, you (and your spouse, if you filed a joint return) must have:
Filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return or
Given us your information in 2020 to receive the Economic Impact Payment with the Non-Filers: Enter Payment Info Here tool or
Given us your information in 2021 with the Non-Filer: Submit Your Information tool; and
Lived in a main home in the United States for more than half the year (the 50 states and the District of Columbia) or filed a joint return with a spouse who has a main home in the United States for more than half the year; and
A qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number; and
Made less than certain income limits.
Recent legislation includes several provisions to help individuals and businesses who give to charity.
The new law generally extends four temporary tax changes through the end of 2021.
Deduction for individuals who don't itemize
Usually taxpayers who take the standard deduction cannot deduct their charitable contributions. The law now permits taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions they made to certain qualifying charitable organizations.
These taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.
Cash donations
Most cash donations made to charity qualify for the deduction. There are some exceptions. Cash contributions that are not tax deductible include those:
Made to a supporting organization
Intended to help establish or maintain a donor advised fund
Carried forward from prior years
Made to most private foundations
Made to charitable remainder trusts
These exceptions also apply to taxpayers who itemize their deductions.
Cash contributions include those made by check, credit card or debit card as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization. Cash contributions don't include the value of volunteer services, securities, household items or other property.
100% limit on eligible cash contributions made by taxpayers who itemize deductions in 2021
Taxpayers who itemize can generally claim a deduction for charitable contributions to qualifying organizations. The deduction is typically limited to 20% to 60% of their adjusted gross income and varies depending on the type of contribution and the type of charity.
The law now allows taxpayers to apply up to 100% of their AGI, for calendar-year 2021 qualified contributions. Qualified contributions are cash contributions to qualifying charitable organizations.
The 100% limit is not automatic; the taxpayer must choose to take the new limit for any qualified cash contribution. Otherwise, the usual limit applies. The taxpayer's other allowed charitable contribution deductions reduce the maximum amount allowed under this election. Eligible individuals must make their elections on their 2021 Form 1040 or Form 1040-SR.
Corporate limit increased to 25% of taxable income
The law now permits C corporations to apply an increased corporate limit of 25% of taxable income for charitable cash contributions made to eligible charities during calendar year 2021. The increased limit is not automatic. C corporations must the choose the increased corporate limit on a contribution-by-contribution basis.
Increased limits on amounts deductible by businesses for certain donated food inventory
Businesses donating food inventory that are eligible for the existing enhanced deduction may qualify for increased deduction limits. For contributions made in 2021, the limit is increased to 25%. For C corporations, the 25% limit is based on their taxable income. For other businesses, including sole proprietorships, partnerships, and S corporations, the limit is based on their total net income for the year. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.
Resources:
IRS provides tax inflation adjustments for tax year 2021
Advance Child Tax Credit Payments in 2021
Expanded tax benefits help individuals and businesses give to charity in 2021