Summary of Key Tax Provisions from Recent Tax Legislation
Economic impact payments (EIPs)
The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate credit. If you qualified, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return.
If you received an EIP, you should receive a letter from the IRS. Keep this for record-keeping purposes to help us figure any potential adjustment.
Child tax credit
As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:
- Amount has increased for certain taxpayers
- Is fully refundable (meaning taxpayers can receive it even if they don’t owe the IRS)
- May be partially received in monthly payments
- Is applicable to children age 17 and younger
The IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis.
Charitable contribution deductions
Individuals who do not itemize their deductions can take a charitable deduction of up to $300 ($600 for joint filers). Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%).
Be sure that the charity you’re considering is a qualified charity to receive tax-deductible contributions. The IRS has an online search tool, Exempt Organizations Select Check (www.irs.gov).
As a Reminder….In order to claim a deduction for any donation of $250 or more, you must have a contemporaneous written acknowledgment from the charitable organization. Contemporaneous means you have it when you file the return. The acknowledgement is usually a letter from the charity on the charity’s letterhead that states the amount of the cash donation or, if non-cash, a description of the item and a statement of whether the organization provided anything to the donor such as a meal or DVD in exchange for the donation. If something was provided, its value must be stated. Some charities don’t provide proper records. Thus, it’s important to review letters from the charity and, if incomplete, follow up to get proper documentation.
Required minimum distributions (RMDs)
RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reach that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.
Another thing to note that’s different in 2021 is the treatment of unemployment compensation. There is no exclusion from income in 2021. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021.
Review 2021 Withholdings and Estimated Tax Payments
When completing last year’s returns, some individuals received an unwelcome surprise in the form of reduced tax refunds or possibly payments due. Several factors may have caused this change, but often it was because individuals needed to adjust their payroll withholding deductions or pay estimated taxes.
Now is a good time to adjust withholding, if necessary. This will avoid unwelcome surprises as well as unwanted penalties for not paying enough in tax throughout the year. If withholding is adjusted in November/December, the total amount of withholding is assumed to be made ratably over the entire year.
The 2021 standard deduction is now:
- $12,550 for single and married filing separately filers
- $18,800 for heads of households
- $25,100 for joint filers and surviving spouses
The net investment income tax (NIIT)
The income thresholds for this tax – $200,000 for single or head of household taxpayers and $250,000 for married filing jointly taxpayers; these don’t adjust with inflation. If you have income above these thresholds and have certain net investment income, you’ll be subject to this 3.8% tax on the lesser of net investment income or the excess of income over these thresholds. Investment income subject to the tax include taxable interest/dividends from stocks and bonds, certificates of deposit and mutual funds and capital gains from the sale of these assets. If rental income is treated as passive income, then it’s subject to this tax. Activities that meet the self-rental and real estate professional rules aren’t subject to NIIT.
The American opportunity tax credit (AOTC) and lifetime learning credit are just that: credits, which are much more favorable than deductions. These provisions reduce the taxes you pay dollar for dollar. The AOTC is even refundable for some individuals, meaning you could receive up to $1,000 in a refund by using this credit. This credit is now a permanent tax break.
Income limits for AOTC
- To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
- You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
- You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).
Income limits for lifetime learning credit
- For 2021, the amount of your credit is gradually reduced (phased out) if your MAGI is between $59,000 and $69,000 ($119,000 and $139,000 if you file a joint return).
One recent change is that Sec. 529 plans now allow for up to $10,000 in annual tax-free distributions per beneficiary (regardless of the number of contributing plans) for tuition at elementary and secondary schools, including religious or other private schools.
Whether or not you’re a business owner, there is no surefire way to prevent your identity from being stolen, even if you choose not to use online banking, shopping or data storage, your information is out there, as we know from news stories on breaches within credit bureaus and other entities. The best thing you can do as an individual is to learn how identity theft happens, take steps like these listed here and know what to do if it happens to you. The Federal Trade Commission has a very helpful website –– www.identitytheft.gov –– that walks you through what you need to do to report and recover from identity theft.
Business owners, do your best to protect your customer’s information to avoid potential loss of trust should your system be hacked. Only collect and retain the information you need and be sure you dispose of your customer’s data safely as well. Make sure that sensitive personal information is only available to those who need it and that employees are properly trained on the importance of their part in protecting customer information. Make sure you have a plan in place for protecting data and for steps to take in case of a breach.
See IRS Publication 4557, Safeguarding Taxpayer Data, for suggestions on how taxpayers can best protect their data. https://www.irs.gov/pub/irs-pdf/p4557.pdf
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