Reinhart and Company Reinhart and Company

2021 Tax Update - Individuals

Tax Rates

Rate Single Filers Married Filing Jointly
10% Up to $9,950 Up to $19,900
12% $9,951 to $40,525 $19,901 to $81,050
22% $40,526 to $86,375 $81,051 to $172,750
24% $86,376 to $164,925 $172,751 to $329,850
32% $164,926 to $209,425 $329,851 to $418,850
35% $209,426 to $523,600 $418,851 to $628,300
37% over $523,600 over $628,300

Standard Deduction

The standard deduction is increased to $25,100 for married individuals filing a joint return, $18,800 for head-of-household filers, and $12,550 for all other individuals.

Personal Exemptions

Personal exemptions have been eliminated from 2021 taxes.

Deductions and Credits

Mortgage interest deduction. The mortgage interest deduction is limited to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after December 31, 2017, and beginning before January 1, 2026. For acquisition indebtedness incurred before December 15, 2017, the law allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately).

The law also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness.
*NOTE* - Loans that are used for
substantial improvements to a home (even if borrowed as a “home equity loan”) are classified by the IRS as “home acquisition debt” and the interest to this debt is deductible. Per IRC sec 163(h)(3)(B)(i)(I)

State and local taxes. Annual itemized deductions for all nonbusiness state and local taxes, including income taxes and property taxes are limited to $10,000 ($5,000 for married taxpayer filing a separate return). Sales taxes may be included as an alternative to claiming state and local income taxes.

Miscellaneous itemized deductions. All miscellaneous itemized deductions that are subject to the two-percent floor are temporarily repealed.

Medical expenses. For Tax years 2020 and forward the threshold for the deduction becomes 7.5 percent of adjusted Gross Income.

Alimony. For any divorce or separation agreement executed after Dec. 31, 2018, the IRS provides that alimony and separate maintenance payments are not deductible by the payer spouse. The provision that provided that those payments were includible in income by the payee spouse, has been repealed.

Moving expenses. The moving expense deduction is repealed through 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station.

Moving expense reimbursements. The exclusion from gross income and wages for qualified moving expense reimbursements is repealed through 2025, except in the case of a member of the armed forces on active duty who moves pursuant to a military order.

Educator’s classroom expenses. There is no change to the allowance of an above-the-line $250 deduction for educators’ expenses incurred for professional development or to purchase classroom materials.

Education provisions

The student loan interest deduction remains unchanged at $2,500. The American Opportunity Tax Credit also remains unchanged providing for a maximum credit of $2,500.

Under the Tax Cuts and Jobs Act, Sec. 529 plans may distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than on a per-account basis.

The act also modified the exclusion of student loan discharges from gross income by including within the exclusion certain discharges on account of death or disability.

Family Incentives

The child tax credit is increased to $3,000 for children ages 6 through 17 at the end of 2021, $3,600 for children ages 5 & under at the end of 2021. Child Tax Credit begins to be reduced to $2,000 per child if 2021 Modified Adjusted Gross Income exceeds: $150,000 if MFJ 112,500 if HOH; $75,000 if single of MFS.

The child tax credit provides for a $500 nonrefundable credit for qualifying dependents other than qualifying children.

Alternative Minimum Tax

The Tax Cuts and Jobs Act retains the alternative minimum tax (AMT) for individuals with modifications. It temporarily increases (through 2025) the exemption amount to $114,600 for joint filers ($73,600 for others, except trusts and estates). The new law also raises the exemption phase-out levels so that the AMT will apply to an income level of $1,047,200 for joint filers ($523,600 for others). These amounts are all subject to annual inflation adjustment.

Cares Act Rules

  • Recovery rebate credit: $1,200 ($2,400 for married filing jointly) plus $500 per qualifying child. Phases out for incomes above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 (for other individuals).
  • 10% early-withdrawal penalty waived: On up to $100,000 of retirement distributions made for coronavirus-related reasons.
  • Required minimum distributions (RMDs) suspended: For certian defined contribution plans and IRAs.
  • Charitable contributions: For nonitemizers, above-the-line deduction for cash donations of up to $300 or $600 for MJF. For itemizers, qualified contributions disregarded for purposes of 60%-of-adjusted-gross-income (AGI) limitation; qualified contributions deductible up to 100% of individual's contribution base less amount of all other charitable contributions for which charitable contribution deduction is allowed.
  • Excess loss limitation repealed: The Sec. 461(I) limitation is repealed for 2020.

Economic Impact Payment: $600 ($1200 for married filing jointly) plus $600 for each qualifying child. Phases out for incomes above $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 (for individuals).

If the third-round of Economic Impact Payments was not received $1,400 could be claimed per person.

Earned Income Credit

EIC Changes in 2021

  • There have been eligibility changes in 2021, allowing more people without children to claim the credit & also allows people with up to $10,000 investment income to claim the credit now (investment income limitation previously was $3,650).)
  • The age range in order to claim the credit now allows individuals age 19 (in certain cases age 18) to be eligible for the credit (if the taxpayer is under age 24 & a full-time student, the taxpayer does not qualify for EIC until age 25 or older).
    · Taxpayers w/o children can potentially claim a credit amount of $1,502 if they are eligible (up from $538 in 2020).
    · Earned income must be under $21,403 ($27,380 if MFJ) if claiming the EIC w/o a child.
    · 3 or more children: max. credit of $6,728 (previously $6,660)
      2 children: max. credit of $5,980 (previously $5,920)
      1 child: max. credit of $3,618 (previously $3,584)
      w/o children: max. credit of $1,502 (previously $538)
  • The age range in 2021 now also has no maximum age restriction making it so more people can claim the credit.
    · New age range in 2021 is 19 & older (unless a full time student, which would be 25 & older to be eligible).
  • Given the changes to EIC, by law the IRS cannot issue refunds for returns claming EIC before mid-February so expect the refund later than usual.
  • Taxpayers w/o children should take advantage of EIC before the credit reverts to an amount more similar to the 2020 credit amount, due to the American Rescue Plan Act.