With 2020 in the rear-view mirror, we look for a fresh start in the new year. We find ourselves approaching tax season and setting expectations for the 2021 tax year. Below you can find a summary of known tax law and policy changes for 2021:
- Higher standard deduction: Annual inflation adjustment.
- Tax credit changes: Income limit amounts were slightly increased for the earned income credit, the saver’s tax credit, and lifetime learning credit.
- IRA phase-outs increase: For Traditional and Roth IRAs, the amount of income you can make until you are fully phased out has increased.
- Increase of estate tax lifetime exclusion amount: This amount rises to $11.7 million, up from $11.58 million in 2020. Under current law, this amount will sunset December 31, 2025.
- Student loan forbearance is extended: This continues 0% interest for borrowers and no payments are required until October 2021
In his last few days in office, President Trump signed The Consolidated Appropriations Act, 2021. The bill includes additional coronavirus relief as well as The Taxpayer Certainty and Disaster Tax Relief Act of 2020, which extends various tax deductions and credits that were due to expire at the end of 2020. The key points are summarized below:
- Certain credits expected to expire get extended: New markets tax credit and work opportunity credit are extended.
- Treatment of mortgage insurance premiums as qualified residence interest: This has been extended for a year.
- Above the line deduction for charitable contributions: The $300 above the line charitable deduction allowed for 2020 under the CARES Act is extended through 2021 and increased to $600 for married filing jointly taxpayers in 2021.
- Charitable contribution limit: This bill extends the 100% of AGI limitation on cash contributions to public charities under the CARES Act through 2021 for those taxpayers who itemize.
- Itemized Deduction for Unreimbursed Medical Expenses: This bill makes permanent the 7.5% AGI limitation for unreimbursed medical expense deductions.
- Health and Dependent Care FSA’s: Permits employers to allow employees to rollover unused funds in FSA’s from 2020 to 2021 and from 2021 to 2022.
Following, are some of the key provisions of the newest legislation, the American Rescue Plan Act of 2021.
- Economic Impact Payments: A third round of stimulus payments were announced. Those eligible will automatically receive $1,400 for individuals or $2,800 for married couples, plus $1,400 for each dependent, subject to phase-out’s.
- Unlike prior rounds of Economic Impact Payments, families will get a payment for all their dependents claimed on a tax return, not just their qualifying children under 17.
- Single filers: $75,000 – $80,000
- Head of Household filers: $112,500 – $120,000
- Married-Joint filers with income below $150,000 – $160,000
- Child Tax Credit: The amount previously received for this credit has been increased from $2,000 to $3,600 for children under age of 6, and $3,000 for other children under age 18
- The credit is fully refundable
- A portion of the credit may be paid in advance, beginning in July
- Unemployment: The ‘extra’ unemployment on top of your regular benefit is $300/week. If your AGI was under $150,000, unemployment compensation of $10,200 can be considered tax free
- Dependent Care FSA’s: The limit for 2021 is increased to $10,500 ($5,250 for married employees filing separately).
As the year evolves, we will continue to monitor legislative policy and communicate any major changes that may impact you. If you have any questions about current or projected legislation, please contact your Marshall Team.
