With the 2020 tax filing season…FINALLY… in the rearview mirror, now is the time to become aware of major changes for 2021. Here’s what you need to know.
With the end of the 2020 filing season upon us, now is the time to become aware of major changes for 2021. But be prepared, politicians are making noise in preparation for another fun-filled year of late breaking changes. Here is what we know know.
- Tuition and Fees Deduction eliminated. This oft-expired tax break is now permanently closed.
- Lifetime Learning Credit phaseouts increase dramatically. To help reduce the impact of the elimination of the Tuition and Fees Deduction, the income phaseout of this education expense tax break is dramatically increasing to $80,000 unmarried ($160,000 married filing joint). This is an increase of $20,000 to $40,000!
- Medical and other health care related expense threshold to remain at 7.5% of income. To begin deducting health expenses as an itemized deduction, the expense threshold no longer moves to the planned 10% level.
- Dramatically enhanced Child Tax Credit. The old Child Tax Credit remains $2,000 per child with income phaseouts of $200,000 single and $400,000 married. But you can now receive $3,000 per child under the age of 17 (up from 16) AND $3,600 for each child under the age of 6 in 2021. The enhanced credit phases out at much lower levels. Even better, more of the credit is refundable (you do not necessarily need income) and you can receive half of the credit with monthly payments beginning in July…assuming the IRS can implement the program.
- Enhancements in Dependent Care Credit and the Earned Income Tax Credit. Without getting into details here, know that the amount of money that can be applied to help pay for daycare is increasing. And for those with low income and no children can now receive much more using the earned income tax credit.
- Mortgage insurance premium deductibility. You may still deduct mortgage insurance premiums as an itemized deduction. This was set to expire last year.
- Exclude discharge of mortgage indebtedness. With the extension of this law, qualified debt forgiveness on qualified mortgages is still not considered income.
- Above the line charitable deductions. If you do not itemize, you can deduct up to $300 in qualified charitable deductions ($600 for married couples).
For Small Businesses
- PPP loans for small businesses. PPP loan forgiveness is no longer a taxable event for your small business. The same goes for any second round loans your business receives this year if they qualify.
- 100% meal deductibility. Business meals are typically only deductible at 50%. To help aid restaurants during the pandemic, a new law allows for 100% meal expense deductions for both 2021 and 2022.
- Numerous general business credits extended. New laws extend expiring tax credits for many small businesses. There are too many to mention here, but common extended credits include; work opportunity credit, credit for paid family and medical leave, and employer paying employee student loan payments.
Remember, these are still early days in changing the tax code for 2021. It seems like cementing tax changes for the current year BEFORE it starts is a bit too rational, so be prepared and look for future announcements of rule changes.