In these challenging times, we hope you and your loved ones are safe and in good health. We recognize many of you have experienced many unexpected changes and hardships due to the COVID-19 crisis this past year. Congress addressed the crisis by passing the Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” in March 2020 and the Consolidated Appropriations Act, 2021 or “CAA, 2021” in December 2020. While these bills may provide you with some much needed relief, they may also present a few challenges and may impact your tax or retirement planning. Highlighted below are some of the more significant changes made by this legislation:
Second round of stimulus checks is coming —CAA, 2021 included a second round of Economic Impact Payments or “EIP”. The IRS is making payments of up to $600 to single taxpayers or up to $1,200 to married couples filing joint returns. Parents may receive an additional $600 for each dependent child under age 17. The stimulus payment is completely phased out for single filers with an AGI over $87,000 and for joint filers with no children with AGI over $174,000. The AGI phase out limitation is increased by $12,000 for each child. For taxpayers whose AGI exceeds the above thresholds, the payment amount is phased out at the rate of $5 for each $100 of income. The EIP you receive will not be included in your income for tax purposes.
Charitable contributions deductible by non-itemizers – For 2020, all taxpayers who take the standard deduction may take up an additional $300 deduction for cash contributions to qualified charitable organizations. CAA, 2021 extended this deduction for the 2021 tax year and modified to allow $300 for single filers and $600 for married filers.
No income limitation on charitable contributions – Previously, charitable contribution deductions were limited to 60% of a taxpayer’s adjusted gross income. In response to the COVID pandemic, the limit on cash charitable contributions by an individual in 2020 was increased to 100% of the individual’s adjusted gross income. CAA, 2021 extends this rule through 2021.
In addition to the above modifications, there were some minor changes outside of major legislation. Highlighted below are some of those changes, with a few reminders:
Individual tax rates — The 2021 individual income tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Standard deduction — In 2021, the standard deduction will be $25,100 for joint filers, $18,800 for heads of households, and $12,550 for singles.
Child and dependent credits — The child tax credit is currently $2,000 per child under the age of 17. Up to $1,400 of the credit is refundable, even if the taxpayer has no taxable income. Additionally, a $500 nonrefundable credit is provided for dependents other than minor children. For high income earners, the credit phases completely out when income reaches $440,000, for joint filers, or $240,000, for all others.
$10,000 limit on state and local tax deduction — The total state and local tax deduction is still limited to $10,000 for 2021.
Limits on mortgage interest deduction — Taxpayers may only deduct interest on the first $750,000 of mortgage acquisition debt incurred after December 15, 2017. Mortgage acquisition debt is any debt secured by a taxpayer’s principal residence which is used to acquire, construct, or substantially improve the residence. Mortgage interest on a principal residence which is not used for those purposes is no longer deductible.
Medical expense deduction — All individuals may deduct medical expenses if the expenses exceed the new floor of 7.5% of adjusted gross income, regardless of age, for both 2020 and 2021.
No deduction for investment expenses or unreimbursed employee expenses — There is still no deduction for employee expense, investment expense, or any other 2% miscellaneous itemized deduction in 2021.
Adoption Credit — In 2021, the credit for adoption of a child with special needs is $14,440 and the maximum credit allowed for other adoptions other than the adoption of a special needs child is $14,440.
IRA contributions — When you have earned income, you can contribute up to $6,000 in 2020, and $6,000 in 2021. You have until April 15th, 2021 to make your 2020 contribution. If you are 50 or older, you can contribute another $1,000 for a total of $7,000. As a reminder from the Secure Act, there is no age limit for making regular contributions to an IRA.
401K Plan contributions — The limit is unchanged for 2021 at $19,500. The catch-up contribution (50 and older) is $6,500.
In order to assist you with these tax rules throughout the coming year, we are providing the attached guide (click here). In it you will find brief summaries of all the important limits and rates.