Tax Credits and Exemptions Overview for 2021

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Any bookkeeping, business or tax article contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor can it be used to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

Tax Credits and Exemptions Overview for 2021

Individuals and families need to know about the Tax Credits and Exemptions provisions that are in place for 2021. There are some important changes from the current law that will impact filers in ways both large and small. Here’s an overview of the Tax Credits and Exemptions for the tax year 2021.

 

Personal Exemptions

The Tax Cuts and Jobs Act suspended personal tax exemptions for tax years 2018 through 2025. Personal exemptions will be subject to the “standard” deduction.

Standard Deduction

This tax-filing season, make sure you have the right information to accurately prepare your taxes by knowing the available tax credits for you. The standard deduction has increased under the Tax Cuts and Jobs Act. For married couples filing a joint return in 2021, the standard deduction is $25,100. While the standard deductions for singles and married individuals filing separately is $12,550. Heads of households get a deduction of up to $18,800.

In 2021, the standard deduction for senior citizens will be slightly higher. The additional standard deduction for blind people and senior citizens in 2021 is $1,350 for married individuals and $1,700 for singles and heads of households.

 

Income Tax Rates

For the upcoming tax year, the top tax rate of 37 percent affects individuals whose income exceeds $523,601 ($628,301 for married taxpayers filing a joint return). Marginal tax rates for 2021 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. While the tax rate structure remained similar to prior years under tax reform (i.e., seven tax brackets), the statutory tax-bracket thresholds increased significantly for each filing status.

 

Estate and Gift Taxes

In the year 2021, each individual is allowed an exemption of $11.70 million for estate, gift, and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $15,000.

 

Alternative Minimum Tax (AMT)

For income earned in 2021, the exemption amounts for single filers increased to $73,600, for heads of household to $114,600, for married filers jointly to $114,600, and for qualifying widows or widowers and married taxpayers filing separately to $57,300.

 

Pease and PEP (Personal Exemption Phaseout)

Under the Tax Cuts and Jobs Act (TCJA), the Pease limitations on itemized deductions have been eliminated and the personal exemption phase-out has been repealed.

 

Flexible Spending Account (FSA)

Flexible Spending Accounts are subject to a $2,750 cap in 2021 (same as 2020) and only apply to salary reductions made under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reductions are made.

 

Long-Term Capital Gains

In 2021, taxpayers with taxable income below $40,400 for single filers and $80,800 for married filing jointly continue to pay 0 percent capital gains tax. For individuals whose income exceeds $445,850 ($501,600 married filing jointly), the rate for both capital gains and dividends is capped at 15 percent.

 

Miscellaneous Deductions

For the 2018-2025 tax years, the Miscellaneous Expenses category on Schedule A of your federal income tax return has been eliminated. As such, no expenses related to tax preparation, moving (other than moves due to military orders), job hunting or unreimbursed employee expenses like tools, supplies, required uniforms, travel, and mileage can be deducted.

Note: Business owners can still deduct business-related expenses on Schedule C.

 

Individuals – Tax Credits

Child and Dependent Care Credit

The Child and Dependent Care Tax Credit was made more generous in 2021 by the American Rescue Plan Act of 2021. The new parameters allow you to claim tax credits up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for the credit.

Many more taxpayers will qualify for the tax credit this year and for many who were not previously eligible, the amount of the tax credit will be higher than in previous years. However, taxpayers with an adjusted gross income over $438,000 will not be eligible for this credit, even if they have claimed it in the past.

 

Earned Income Tax Credit (EITC)

For the tax year 2021, the maximum earned income tax credit (EITC) for low, and moderate-income workers and working families increased to $6,728. This is up from $6,660 in 2020. The maximum credit for taxpayers with no qualifying children is $1,502.

The maximum income limit for the EITC in 2020 was $57,414 for married couples who file jointly and $51,464 for taxpayers who are single or head of household. The credit varies by family size, filing status, and other factors. The maximum tax credit is available to joint filers with three or more qualifying children.

 

Individuals – Education Expense

American Opportunity Tax Credit and Lifetime Learning Credit

If you are claiming the American Opportunity Tax Credit, the maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000 per return. Your modified adjusted gross income (MAGI) must be $69,000 or less ($139,000 or less for married filing jointly) to claim the full credit for either.

Student Loan Interest

In 2021, you can deduct up to $2,500 in student-loan interest if your annual income is less than $70,000 (single) or $140,000 (married filing jointly). The tax credit cannot be claimed if your income is more than $85,000 for single filers ($170,000 if married filing jointly).

 

Individuals – Retirement

Contribution Limits

For 2021, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,500 (same as 2020). For persons age 50 or older in 2021, the limit is $26,000 ($6,500 catch-up contribution).

Retirement Savings Contributions Credit (Saver’s Tax Credit)

In 2021, the adjusted gross income limit for the saver’s tax credit for low and moderate-income workers is $66,000 for married couples filing jointly, $49,500 for heads of household, and $33,000 for married individuals filing separately and for singles. The maximum credit amount is $2,000 ($4,000 if married filing jointly). As a reminder, starting in 2018, the Saver’s Credit can be taken for your contributions to an ABLE account if you’re designated as the beneficiary. However, keep in mind that any distributions you receive from your ABLE account may affect the saver’s tax credit.

 

Conclusion

Having to file an annual income tax return can be quite a burden for individual taxpayers. If you didn’t think you would have a lot of personal expenses to deduct this past year, think again. You still can save yourself some money by making sure your exemptions and credits aren’t going to waste—and the easiest way to accomplish that is by checking the IRS table. You can also have an experienced Enrolled Agent do your taxes for you. This way, you can rest assured that your tax preparation is done right and that no stone is left unturned when it comes to your credits.

 

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