By: Cassandra Bartole
With a brand new year comes brand new changes to the tax code, we want to take this opportunity to inform you of the tax law changes you should expect to see. Below we highlight some of the most important changes that you should be aware of when you file in 2022.
Child Tax Credit
For the tax year 2021, there have been some changes to the Child Tax Credit. In 2020 the child tax credit was $2,000 per child 16 years old or younger, but for 2021 it has increased to $3,000 for most children and $3,600 for children 5 years of age and under. For single filers the phase out begins to phase out if their adjusted gross income is above $75,000, $112,500 for head-of-household filers, and $150,000 for married filing joint filers. Another change to this credit for 2021 is that it is fully refundable.
Recovery Rebate Credit
Many people were happy to learn that the American Rescue Plan authorized a third round of stimulus checks. The amount of the third round of stimulus checks were for $1,400, plus an additional $1,400 for each dependent in the family. However, there was a phase out. The phase out for married filing jointly is adjusted gross income above $150,000, $112,500 for head-of-household, and $75,000 for single filers. For people that were eligible for the third-round of stimulus checks but did not receive them or got less than they should have, there may be relief available in the 2021 tax credit known as the recovery rebate credit.
The required minimum distributions are back for 2021. In 2020 seniors were able to skip their required minimum distributions without having to pay a penalty, but for 2021 anyone who is at least 72 years of age by the end of the year is required to take the required minimum distribution for 2021.
Earned Income Tax Credit
For 2021, more people who work without qualifying children will be able to claim the earned income tax credit. The maximum credit has increased from $543 to $1,502 for 2021 for childless workers. Those without a qualifying child must be between 25-65 years of age at the end of the year, live within the United States, and cannot be claimed as a dependent by another taxpayer.
Long Term Capital Gain Rates
The long term capital gain rates and qualified dividends have not changed for 2021. The 0% rate applies for individual taxpayers with income up to $40,400 on single returns which was $40,000 in 2020, $54,100 for head-of-household which was $53,600 for 2020, and $501,601 for married filing joint returns which was $496,601 for 2020. The 20% rate applies for individual taxpayers with income up to $445,851 on single returns which was $441,451 in 2020, $473,751 for head-of-household which was $469,051 for 2020, and $501,601 for married filing joint returns which was $496,601 for 2020. The 15% rate is for anyone one between the 0% and 20% break points.
For 2021, there is an increase in all standard deductions. Married filing jointly filers now receive a $25,100 standard deduction, up from $24,800 in 2020, plus $1,350 for each spouse 65 years of age or older, up from $1,300 in 2020. Single filers can claim a $12,550 standard deduction, up from $12,400 in 2020, and $14,250 if they are 65 years of age or older, up from $14,050 in 2020. Head-of-household filers received a $18,800 standard deduction, up from $18,650 in 2020, plus an additional $1,700 once they reach the age of 65.
In 2020 unemployment compensation was not taxable, but in 2021 Uncle Sam will fully tax unemployment compensation.
Charitable Gift Deduction
The charitable donation deduction remains the same as 2020 which was the “above-the-line” deduction, but now the deduction is per person, so married filing joint filers can deduct up to $600 (originally was limited to $300 per return).
Estate and Gift Taxes
For 2021 the lifetime estate and gift tax exemption has increased from $11.58 million to $11.7 million — $23.4 million for couples if probability is elected by timely filing Form 706 after the death of the first-to-die spouse but the tax rate remains at 40%. The gift tax exclusion remains at $15,000 per recipient without having to file a gift tax return or tap your lifetime estate and gift tax exemption.
Education Tax Breaks
The tuition and fees deduction was repealed for the 2021 tax year, but to balance out the loss of the deduction, the lifetime learning credit phase-out thresholds were permanently increased. In 2020 the phase-out for married filing joint filers was a modified AGI from $118,000 to $138,000 which has now been increased to be between $160,000 to $180,000. For single filers the phase-out was a modified AGI between $59,000 and $69,000 which has increased to be between $80,000 to $90,000.
Standard Mileage Rates
For 2021 the standard mileage rates have decreased from $0.575 to $0.56 for business driving and mileage allowance for medical travel and military moves has decreased from $0.17 to $0.16. The charitable driving rate will remain at $0.14 a mile as it has been in previous years.
Long-Term Care Insurance Premiums
The deduction for long-term care insurance premiums have increased for 2021. Any taxpayer who is 71 years of age or older can write off as much as $5,640 per person up from $5,430 in 2020. Taxpayers 61 to 70 years of age can deduct up to $4,520 up from $4,350 in 2020. Taxpayers 51 to 60 years of age can deduct up to $1,690 up from $1,630 in 2020. Taxpayers 41 to 50 years of age maximum deduction is $850 and $450 for 40 years of age and younger. Taxpayers are still subject to the 7.5% limitation related to their adjusted gross income.
Health Savings Accounts (HSAs)
In 2021 the annual cap for deductible contributions to health savings accounts rose from $3,550 to $3,600 for self-only coverage and from $7,100 to $7,200 for family coverage.
Alternative Minimum Tax
For 2021 the alternative minimum tax exemption has increased from $113,400 to $ 114,600 for married filing jointly filers and from $72,900 to $73,600 for single and head-of-household filers.
There is also higher phaseouts for the exemption in 2021. These phaseouts are $1,047,200 for married filing jointly filers and $523,600 for single and head-of-household filers which are increased from $1,036,800 and $518,400 in 2020.
Tax Brackets for Single/Married Filing Jointly/Head of Household
As with all of the above strategies, we highly encourage you to discuss any strategies with your accountant before implementation. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult with your own tax, legal, or accounting advisor before engaging in any transaction.