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Indianapolis, IN 46260

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2021 Tax Law Updates

What's New For The 2021 Tax Year!

What's New For The 2020 Tax Year!

The TCJA, which was passed into law a little over a year ago, went into effect impacting tax law changes starting in 2018.  With these sweeping changes, most every taxpayer was impacted by the new tax law in some way.  See below some of the "Key TCJA Changes" impacting most taxpayers. 

Key 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 2021, 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 suspended for 2020.  Which means, you can’t claim a personal exemption deduction for yourself, your spouse, or your dependents as you have in previous years,

Standard Deduction for 2021standards

  • Single filers  $12,550
  • Head of household filers  $18,800
  • Married filing separately  $12,550
  • Married couples filing jointly  $25,100

 

Child Tax Credit & Additional Child Tax Credit

  • For 2021, the maximum credit increased to $3,000 per qualifying child, and 3600 per qualifying child who 5 years or younger.
  • The new law also increased the age limitation from 16 to 17
  • The full amount of the credit can be refundable for each qualifying child as the additional child tax credit.

Dependent Tax Credit

  • A  credit of up to $500 is 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.

Mileage Rates

The standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56 cents for every mile of business travel driven.
  • 16 cents per mile driven for medical or moving purposes.
  • 14 cents per mile driven in service of charitable organizations.

Alternative Minimum Tax

  • The Alternative minimum tax (AMT) exemption amount increased to $73,600 ($114,600 if married filing jointly or qualifying widow(er); $57,300 if married filing separately).
  • The income level at which the AMT exemption begins to phase out has increased to $523,600 or $1,047,200 if married filing jointly.
  • The bill eliminates the corporate alternative minimum tax.
  • This increase will result in fewer taxpayers paying AMT.

Health Care 

  • Please note, for tax year 2019 and all subsequent years, the shared responsibility payment was eliminated.
  • If you need health coverage, 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 these dates, so 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 Dec 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.

 

Moving Expenses

  • 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.

Changes to the charitable contribution deduction

  • Taxpayers who don't itemize deductions may qualify to take a deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.

Economic impact payments and claiming the recovery rebate credit

  1. For tax year 2021, the Child Tax Credit is increased from $2,000 per qualifying child to $3,600 for each qualifying child who has not reached age 6 by the end of 2021, or $3,000 for each qualifying child age 6 through 17 at the end of 2021. Note: The $500 nonrefundable Credit for Other Dependents amount has not changed. For more information about the Credit for Other Dependents, see the Instructions for Schedule 8812 (Form 1040)
  2.  Individuals who didn't qualify for the third economic impact payment or did not receive the full amount may be eligible for the recovery rebate credit based on their 2021 tax information. They'll need to file a 2021 tax return, even if they don't usually file, to claim the credit.  
  3. In early 2022, the IRS will send Letter 6475 that contains the total amount of the third economic impact payment and any plus-up payments received. People should keep this and any other IRS letters about their stimulus payments with other tax records. Individuals can also create or log in to IRS.gov online account to securely access their economic impact payment amounts.

Earned income credit

  • Effective for the 2021 tax year only, for taxpayers with no qualifying children the minimum age is lowered to age 19.
  • Effective for the 2021 tax year only, for taxpayers with no qualifying children the minimum age is lowered to age 19.
  • Effective for the 2021 tax year only, if earned income for 2021 is less than the earned income for 2019, the taxpayer may elect to use 2019 earned income to calculate the 2021 EIC.

Dependent care credit and exclusion


  • Effective for the 2021 tax year only, the dependent care expense limitation for one child is increased to $8,000, and the limitation for two or more children is increased to $16,000.  The credit is fully refundable.  
  • The credit equals a percentage of dependent care expenses ranging from 50% for taxpayers with AGI not over $125,000.
  • Effective for the 2021 tax year only, the maximum exclusion under the dependent care assistance program is increased to $10,500 ($5,250 MS)

Medical Expenses

  • Effective after December 31, 2019, distribution from HSAs and Archer MSAs for medical expenses are no longer limited to those medicines and drugs that are prescribed by a physician.
  • All medicines and drugs can be reimbursed tax free without a prescription or recommendation by a physician. Over-the-counter medicines and drugs include amount paid for menstrual care products.

Business Meals

  • Effective for 2021 and 2022 Only, a taxpayer can deduct 100% of the cost of a business meal that is purchased in a restaurant.
  •  Business meals purchased at any other venue is still subject to the 50% limitation, unless one of the other 100% provisions apply

Educator Expense Deduction

  • Educator expenses paid or incurred after March 12, 2020 also include the cost of personal protective equipment, disinfect and other supplies used for he prevention of the spread of COVID-19 in the classroom.
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