2021 Tax Law Updates
The Tax Cuts And Jobs Act (Part 1)
The Tax Cuts and Jobs Act (TCJA), which was passed into law a little approximately two years ago went into effect starting January 2018. With these sweeping changes, most every taxpayer has been impacted by the new tax law in some way. See below the "Key TCJA Changes" impacting most taxpayers. In addition, see our additional pages featuring more changes - "TCJA Changes – Itemized Deductions" and “TCJA Changes related to Investments & Businesses”.
This section will focus on Key TCJA Changes
In addition to lowering the tax rates, some of the changes in the law that affect you and your family include increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, and limiting or discontinuing certain deductions. Most of the changes in this legislation took effect in 2018 for federal tax returns filed in 2019. These changes remain into effect until December 31, 2025.
Income Tax Rates
- For 2019, there remains 7 tax brackets with new individual tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Personal and dependent exemptions
Deduction for personal exemptions was suspended starting 2018. This means you cannot claim a personal exemption deduction for yourself, your spouse, or your dependents as you have in previous years.
All taxpayers will see their standard deduction almost double.
- Single filers will go from a standard deduction of $12,000 for 2018 to $12,200 for 2019.
- Head of household filers will go from a standard deduction of $18,000 for 2018 to $18,350 for 2019.
- Married filing separately will go from a standard deduction of $12,000 for 2018 to $12,200 for 2019.
- Married couples filing jointly will go from a standard deduction of $24,000 for 2018 to $24,400 for 2019.
Child Tax Credit & Additional Child Tax Credit
- For 2018 and 2019, the maximum credit increased to $2,000 per qualifying child.
- Up to $1,400 of the credit can be refundable for each qualifying child as the additional child tax credit.
- You need to have earned at least $2,500 to qualify for the Child Tax Credit
- In addition, the income threshold at which the child tax credit begins to phase out is increased to $200,000, or $400,000 if married filing jointly.
Dependent Tax Credit
- As of 2018, a new credit of up to $500 became available for each of your qualifying dependents other than children who can be claimed for the child tax credit.
- The qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien. The credit is calculated with the child tax credit in the form instructions.
- The total of both credits is subject to a single phase out when adjusted gross income exceeds $200,000, or $400,000 if married filing jointly.
- Therefore you may be able to claim this credit if you have children age 17 or over, including college students, children with a disability, children with ITINs, or other older relatives in your household.
The standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 58 cents for every mile of business travel driven (up from 54.5 cents from 2018).
- 20 cents per mile driven for medical or moving purposes (up from 18 cents from 2018).
- 14 cents per mile driven in service of charitable organizations (unchanged from 2018).
Alternative Minimum Tax
- The Alternative Minimum Tax (AMT) exemption amount increased to $71,700 for single filers ($111,700 if married filing jointly or qualifying widow(er); $55,850 if married filing separately).
- The income level at which the AMT exemption begins to phase out has increased to $510,300 or $1,020,600 if married filing jointly.
- The bill eliminated the corporate alternative minimum tax.
- Under the Tax Cuts and Jobs Act, the requirement to report coverage, qualify for an exemption, or report an individual shared responsibility payment has been repealed for tax year 2019.
- Therefore, for tax year 2019, there is no longer a Federal tax penalty (shared responsibility payment) for not being insured.
- However, please note that there are several states that will have their own mandates (i.e. D.C., Massachusetts, and New Jersey will have tax penalties for non-insurance in 2019. California and Rhode Island will have penalties as of 2020.
- If you need health coverage, you can continue to visit HealthCare.gov to learn about health insurance options that are available for you and your family, how to purchase health insurance, and how you might qualify to get financial assistance with the cost of insurance.
Alimony Deduction Repealed
- Alimony and separate maintenance payments are no longer deductible for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before December 31, 2018, and modified after that date.
- Further, alimony and separate maintenance payments are no longer included in income based on the above dates. Therefore, you won’t need to report these payments on your tax return if the payments are based on a divorce or separation agreement executed or modified after December 31, 2018.
- This means that divorce or separation agreements executed or modified after December 31, 2018 providing alimony will have different tax consequences. The alimony payments will not be deductible for the spouse who makes alimony payments and they will not be included in the income of the receiving spouse.
- The deduction for moving expenses is suspended. During the suspension, no deduction includes the use of an automobile as part of a move.
- There is one exception. This suspension does not apply to members of the U.S. Armed Forces on active duty who move pursuant to a military order related to a permanent change of station. The expenses must qualify as a deduction that the government didn’t reimburse.
- Also, employers will include moving expense reimbursements as taxable income in the employees’ wages because the new law suspends the former exclusion from income for qualified moving expense reimbursements from an employer.
- In other words. unless you are a member of the U.S. military on active duty, you cannot deduct moving expenses and amounts reimbursed by an employer will be taxable income.
Most provisions in the Act affecting individual taxpayers will sunset after 12/31/2025.
The Tax Cuts And Jobs Act (Part 2)
This section focuses on specific TCJA Changes related to Itemized Deductions.
In addition to nearly doubling standard deductions, the Tax Cuts and Jobs Act changed several itemized deductions that can be claimed on Schedule A, Itemized Deductions.
THIS MEANS THAT…Many individuals who formerly itemized may now find it more beneficial to take the standard deduction for 2019. Note the following changes to itemized deductions and how they relate to your specific situation.
State and local taxes/home mortgages:
- In previous years, taxpayers could deduct SALT (State and Local Tax) deductions with no limitation. The new law now limits the amount of state and local property, income, and sales taxes that can be deducted to $10,000. It also caps the amount of mortgage indebtedness on new home purchases on which interest can be deducted at $750,000, down from $1,000,000 in current law.
THIS MEANS THAT…if you do itemize… you can deduct state and local income, sales, and property taxes but only up to $10,000 ($5,000 if Married Filing Separate).
Home Equity Debt Interest:
- For many years interest paid on Home Equity loans up to $100,000 has been deductible as a personal itemized deduction. The new law eliminates the opportunity to deduct any interest from Home Equity loans unless home proceeds were used to buy, build or substantially improve your main or second home.
- Unlike the property tax deduction, mortgage interest is limited to just these two properties.
THIS MEANS THAT…if you do itemize… that interest paid on most home equity loans is not deductible unless the loan proceeds were used to buy, build, or substantially improve your main home or second home.
- Deduction for medical and dental expenses has been modified. You can deduct certain unreimbursed medical expenses that exceed 10% of your 2019 adjusted gross income (up from 7.5% in 2018).
THIS MEANS THAT…if you do itemize…you can deduct the part of your eligible medical and dental expenses that is more than 10 percent of your 2019 adjusted gross income.
Miscellaneous Itemized Deductions:
- The previous deduction for job-related expenses or other miscellaneous itemized deductions that exceeded 2 percent of your adjusted gross income was suspended.
- This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel, as well as any deductions you may have previously been able to claim for tax preparation fees and investment expenses, including investment management fees, safe deposit box fees and investment expenses from pass-through entities.
- The business standard mileage rate cannot be used to claim an itemized deduction for unreimbursed employee travel expenses during the suspension.
THIS MEANS THAT…if you do itemize…if your miscellaneous itemized deductions previously needed to exceed 2% of your adjusted gross income, they are no longer deductible.
- The limit on charitable contributions of cash is 60 percent of your adjusted gross income (up from 50 percent in years prior to 2018).
- Receipts required for donations > $250
THIS MEANS THAT…if you do itemize …you may be able to deduct more of your charitable cash contributions this year.
Casualty and Theft Losses:
- Net personal casualty and theft losses are deductible only to the extent they’re attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster. See the 2019 Instructions for Form 4684, Casualty and Theft Losses, for more information about 2018 disasters.
- The loss must still exceed $100 per casualty and the net total loss must exceed 10 percent of your AGI. In addition, you can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss.
THIS MEANS THAT…if you do itemize…your personal casualty and theft losses must be attributed to a federally declared disaster.
Overall Itemized Deduction Limit:
- The limit on overall itemized deductions is suspended. You may be able to deduct more of your total itemized deductions if your itemized deductions were limited in the past due to the amount of your adjusted gross income. The old rule that limited the total itemized deductions for certain higher-income individuals has been suspended.
THIS MEANS THAT…if you do itemize… your itemized deductions are no longer limited if your adjusted gross income is over a certain amount.
A Final Note on Itemized Deductions:
- You may not take the standard deduction if you claim itemized deductions. Alternatively, if you take the standard deduction, you may not claim itemized deductions.
- For married filing separate taxpayers, if one spouse elects to itemize, the other spouse is also required to itemize. That’s why it is important that you consider what these changes mean for you and your family.
Most provisions in the Act affecting individual taxpayers will sunset after 12/31/2025.
The Tax Cust And Jobs Act (Part 3)
This section focuses on the specific TCJA Changes related to Investments & Businesses.
Business tax rates for C Corporations
- The corporate rate was reduced to 21%.
- Prior, the corporate tax rates ranged from 15% – 35%.
Meals and Entertainment
- Entertainment deduction has been suspended.
- Entertainment includes events such as concerts, theater, ball games, golf outings, etc.
- In addition, there is also no deduction for meals while participating in entertainment.
- Meals with clients remain at 50% deductible, including meals while you travel.
- Previously 100% deduction was allowed for meals provided to all employees when there was a company meeting during a meal break. This was changed to 50% deductible.
- However, holiday parties, company picnics, and employee appreciation events remain at 100% deductible.
New Business Deduction for Pass-Through Income
- Qualified Business Income Deduction
- A 20% tax deduction is allowed for owners of pass-through businesses (including real estate)
- Pass-through businesses include sole-proprietorships, limited liability companies (LLCs), partnerships and S corporations.
- Four Business Classifications
- Non-Service with Taxable income less than $315,000 (MFJ)
- Service with Taxable income less than $315,000 (MFJ)
- Non-Service with Taxable income more than $315,000 (MFJ)
- Service with Taxable income more than $315,000 (MFJ)
- Taxable income greater than$315,000 but less than $415,000
- Non-Service - Limitation phased-in
- Service - Deduction phased-out
- Taxable income greater than $415,000
- Non-Service - Wage/Capital Testing
- Service - No Deduction Allowed
- Taxable income greater than$315,000 but less than $415,000
- TCJA allows used property to qualify for bonus depreciation. Prior law only allowed a bonus depreciation on new assets.
Cash vs Accrual
- TCJA allows businesses with gross earnings under $25 million to file on a cash basis. The prior law required businesses with gross earnings over $ 5 million to file on an accrual basis.
- TCJA retains the maximum rates of 0%, 15% and 20% and breakpoints on net capital gains and qualified dividends. However, the capital gains and dividends rates will use the old tax brackets.
- The recharacterization of Roth conversions will no longer be allowed. You can no longer recharacterize a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA.
- The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans. You can still treat a regular contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA.
- IRA conversions are still allowed if one chooses to covert a Traditional IRA to a Roth IRA.
- For 2019, the contribution limits have increased to $6,000 and $7,000 (if over age 50).
Plan Loans to an Employee that Leaves Employment
- If you terminate employment (or if the plan is terminated) with an outstanding plan loan, a plan sponsor may offset your account balance with the outstanding balance of the loan.
- If a plan loan is offset, you have until the due date, including extensions, to rollover the loan balance to an IRA or eligible retirement plan.
- Traditionally, proceeds from these plans could be used tax-free only for college and graduate expenses. Starting in 2018, up to $10,000 per student can be used tax-free for the cost of public, private or religious elementary or secondary school (regardless of the number of contributing plans).
- The TCJA enables eligible individuals with disabilities to put more money into their ABLE (Achieving a Better Life Experience) accounts, qualify for the Saver’s Credit in many cases and roll money from their 529 plans (also known as qualified tuition programs) into their ABLE accounts.
- You may also rollover limited amounts from a 529 qualified tuition program account of the designated beneficiary to the ABLE account of the designated beneficiary to their family member.
- Saver’s Credit can be taken for your contributions to an Achieving a Better Life Experience (ABLE) account if you’re the designated beneficiary.
- This provision is modified whereby the taxable income of a child that is attributable to earned income is taxed at single rates and unearned income is taxed at trust and estate rates.
- A child is subject to the kiddie tax if: (1) The child has not attained age 18 as of the close of the tax year; or has earned income that does not exceed half of his or her support and is either age 18 or full time student age 19-23 (2) The child's investment income exceeded $2,200 (for 2019) (3) Either parent of the child is alive at the end of the tax year (4) The child is required to file a tax return but does not file a joint return for the tax year.
- The child's earned income is taxed at single taxpayer (unmarried) rates. Accordingly, the kiddie tax is no longer tied to the parents' tax rate.
While many provisions in the Act affecting individual taxpayers will sunset after 12/31/2025, many provision affecting business owners are permanent.