It’s a New Year, but Taxes remain an Old Concern!
By Christopher Kelly
There is always speculation over what a new administration will or will not do concerning the tax code. While changes can be implemented retroactively, it is far more realistic major changes will not go into effect until 2022. Still, every year there are minor alterations that can affect us and we need to be aware.
- The Federal Tax Rates for 2020 – 2021: Understanding your Tax bracket every year is a critical piece of information. The thresholds for 2021 increased by about 1% over 2020 levels without changes in the tax laws to compensate for inflation. In preparing to file on April 15th of this year, (the 2019 filing extension has not been renewed thus far), so the following tax brackets and marginal tax rates are applicable for 2020 filing.
|Filing Single Tax Bracket||Income Range||Married Filing Jointly Tax Bracket||Income Range|
|10%||$0 – $9,875||10%||$0 -$19,750|
|12%||$9,875 – $40,125||12%||$19,750 – $80,250|
|22%||$40,125 – $85,525||22%||$80,250 – $171,050|
|24%||$85,525 – $163,300||24%||$171,050 – $326,600|
|32%||$163,300 – $207,350||32%||$326,600 – $414,700|
|35%||$207,350 – $518,400||35%||$414,700 – $622,050|
|37%||Above $518,400||37%||Above $622,050|
- Higher Standard Deductions: Since the 2017 Tax Cuts and Jobs Act, most taxpayers file applying the Standard Deduction rather than itemizing. The Standard Deduction can be far easier and because the threshold to itemize is high, only an increasingly smaller population are able to benefit from their itemized deductions. The Standard Deduction Table and changes due to inflation are as follows:
|Filing Status||Standard Deduction for Tax Year 2021||Change from 2020|
|Married Filing Jointly||$25,100||+ $300|
|Head of Household||$18,800||+ $150|
|Married Filing Separately||$12,550||+ $150|
Along with the base standard deductions, there are additional “extra add-on” considerations that can be available for taxpayers 65 or older, as well as those with other specific issues. *As always, it is in your best interest to discuss your personal situation with your own tax advisors before taking any action.
- Tax Credits in 2021: While income tax deductions help to lower tax liability, the Tax Credit can actually reduce the ultimate tax bill “dollar-for-dollar.” The change is here is that income limits are slightly up from last year for the 3 types tax credits;
- The Earned Income Tax Credit available to household with lower or mid-level income. The amount awarded differs according to size of family and household income. A unique feature of the earned income tax credit is that the amount can be returned as a refund if the taxpayer does not owe tax to the IRS.
- The Saver’s Tax Credit urges lower or mid-level income tax payers to contribute to their retirement plan, (i.e. 401(k), IRA, etc.) and dependent upon the income generated can provide a credit of 10%, 20%, or 50% of the amount saved in the retirement account.
- The Lifetime Learning Tax Credit provides additional educational tax breaks for traditional college and potentially beyond. Single tax payers who earned less than $59,000 can earn a 20% credit on up to $10,000 in qualified expenses; joint filers can earn the same credit if their income is $119,000 of less. There are reduced credits available for single filers making less than $69,000 per year or $139,000 for joint. The credit is also available for those in graduate school, vocational training and other eligible nontraditional education expenses.
- Retirement Accounts and Tax Planning: The basics surrounding IRAs and 401(k)s have stayed relatively the same for 2021. Annual IRA contribution limits remain at $6,000 for anyone younger than 50 years old, and $7,000 for anyone 50 and older. Anyone younger than 50 making annual contributions to their 401(k) are limited to $19,500, with anyone 50 and over limited to an annual contribution of $26,000. A big change from 2020 to 2021 applies to those are RMD age (Required Minimum Distribution). Part of the CARES Act waived the RMD during 2020, but that waiver has not been renewed. Now in 2021, if you are of the age to begin (or continue) your RMD you must take that distribution before the end of the year. For tax planning you may want to consider the benefits of the QCD (Qualified Charitable Distribution). While a QCD does not provide a charitable income tax deduction, it does reduce the IRA owner’s taxable income which lowers their tax liability, and can lower the taxable portion of Social Security benefits as well as the annual premium for Medicare.
- Health Savings Account: No real changes in this area where taxpayers can mediate higher healthcare costs with an HSA. Single contributor can still deposit up to $3,600 annually, with a minimum deductible of $1,400; or $7,200 for family policies, with a $2,800 minimum deductible. Both scenarios qualify for high-deductible health plan status. For those 55 or older, the $1,000 catch-up contribution is still available for single plan with a maximum out-of-pocket expense factor of $7,000 or $14,000 for family plans.
- Estate Tax and Gift Tax in 2021: The Gift and Estate Tax lifetime exclusion amount has risen to $11.7 million from the 2020 level of $11.58. The actual Gift Exclusion amount remains at $15,000 for an individual, $30,000 for a couple making the gift. This is the dollar amount that can gifted to as many different recipients as the benefactor would like without incurring a gift tax consequence.
This is just a random sampling of our most “standard” and important concerns when tax-time comes around. There are a number of other changes that might have an effect on your personal filing and once again, we strongly urge you to consult with your own professional advisors, and consider setting up that discussion sooner than later. While the “two constants in life are “death and taxes”, at least with taxes we can be proactive!