Hard to believe the 2021 tax year is coming to an end. With the extended filing deadlines these past two years it almost feels like one long year! There are only weeks left before year end, now is the time to review your tax information to see if any of the 2021 tax law changes will impact you and consider some tax planning ideas to reduce your tax bill on April 18, 2022.
Key tax considerations from recent tax legislation
The changes that are scheduled to take place in 2021 were enacted under several tax acts namely the American Rescue Plan Act (ARPA) that was enacted in March 2021, the Consolidated Appropriations Act (December 2020), and the CARES Act (March 2020). Below is a summary of the recent tax law changes to help you plan.
Economic impact payments (EIPs)
The ARPA included provision for the third economic impact payment which was modeled after the 2020 Recovery Rebate Credits in that the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return. If you received an EIP as an advance payment, you should receive a letter 6475 from the IRS. Keep this for record-keeping purposes to help us determine any potential adjustment.
Child tax credit
The ARPA also made a few important changes to the child tax credit (CTC). The CTC amount has increased for certain taxpayers; is fully refundable for most (meaning taxpayers will receive a refund of the credit even if they don’t owe the IRS); and the age for a qualifying child has increased to 17 and younger.
In addition, the IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis. If you received an advanced payment of the CTC, you should receive a letter 6419 from the IRS. Keep this for record-keeping purposes to help us determine any potential adjustment.
Child and Dependent Care Credit
The ARPA increased the amount for the child and dependent care credit. The expansion is currently for the tax year 2021 only. For 2021, the credit is fully refundable with the maximum credit percentage of qualifying expenses increased from 35% to 50%. The credit allows up to $8,000 in expenses for one child/disabled person (up from $3,000 in prior years) and $16,000 for more than one (up from $6,000).
The credit starts to phase out starting at $125,000 of AGI. All families making between $125,000 and $438,000 will receive at least a partial credit.
Charitable contribution deductions
Individuals who do not itemize their deductions can take advantage of a $300 above the line deduction for cash contributions to a qualified charitable organization ($600 for joint filers). In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%).
One of the most tax efficient ways to make a charitable contribution is to consider donating appreciated stocks. Donations of appreciated stock are subject to a lower percentage limit of 30% of AGI, however the tax benefit realized is twofold. The deduction is equal to the fair market value of the stock on the date of the contribution, and you do not have to pay tax on the unrealized appreciation, so it’s a bigger benefit.
Required minimum distributions (RMDs)
RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reach that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.
Another consideration for taxpayers age 70 ½ or older is the Qualified Charitable Distribution (QCD). This is a distribution from a traditional IRA directly to a qualified charity of an amount up to $100,000. The QCD counts towards your annual RMD and reduces your AGI for the tax year.
Unemployment compensation
Another thing to note that’s different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021. Unemployment Compensation is subject to federal income tax and may be subject to state income tax depending on your state.
Excess loss Limitation for non-corporate taxpayers (461(l)
This provision was suspended under the CARES Act for tax years 2018, 2019, and 2020. For 2021 this Excess loss limit is back. Noncorporate taxpayers can only deduct a net trade or business loss up to a maximum of $262,000 ($524,000 for joint returns) in 2021. Business gains and losses reported on 4797 may be included in the loss calculation. Any excess loss becomes an NOL and is carried forward to future tax years.
Repayment of ½ of Self-Employment tax deferred under the CARES Act
Self Employed individuals and household employers who deferred half of their social security taxes for the 2020 tax year must repay half by December 31, 2021. The remainder is due December 31, 2022. The repayment should be made with a separate tax payment and noted that it’s for “deferred Social Security tax” to be correctly applied.
Tax planning items that you may want to consider
- Review withholding and estimated tax payments to avoid unwanted surprises in April.
- Offsetting investment gains and losses or perhaps moving any gains to the lowest tax brackets.
- Funding employer sponsored retirement plans to the max.
- A Roth Conversion. If you find yourself in a lower tax bracket consider converting traditional IRAs to Roth IRAs. You will have to pay the tax on the converted money but the Roth provides for tax-free future growth.
- Consider making a contribution to a Section 529 plans to help save for education; there can be income tax benefits to do so.
- Making additional charitable contributions in 2021 if your total itemized deductions are close to the standard deduction amount ($12,550, Singles; 25,100 MFJ; $18,800, Head of Households). This is called “bunching your charitable contributions. Make a double or triple payment to your favorite charity in 2021 and then use the standard deduction the following year or two.
Year-end planning equals fewer surprises
There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position. See the attached tax brackets for 2021 and 2022 for your reference. We encourage you to consult with your Sobel tax advisor to discuss your particular circumstances.
Tax brackets for income earned in 2021
- 37% for incomes over $523,600 ($628,300 for married couples filing jointly)
- 35% for incomes over $209,425 ($418,850 for married couples filing jointly)
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly)
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly)
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly)
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly)
- 10% for incomes up to $9,950 ($19,900 for married couples filing jointly)
Married filing separately pay at same rate as unmarried. Source: Internal Revenue Service
2021 Capital Gains Tax Rates
| Tax-filing status | Single | Married, filing jointly | Married, filing separately | Head of household |
| 0% | $0 to $40,400 | $0 to $80,800 | $0 to $40,400 | $0 to $54,100 |
| 15% | $40,401 to $445,850 | $80,801 to $501,600 | $40,401 to $250,800 | $54,101 to $473,750 |
| 20% | $445,851 or more | $501,601 or more | $250,801 or more | $473,751 or more |
Tax brackets for income earned in 2022
- 37% for incomes over $539,900 ($647,850 for married couples filing jointly)
- 35% for incomes over $215,950 ($431,900 for married couples filing jointly)
- 32% for incomes over $170,050 ($340,100 for married couples filing jointly)
- 24% for incomes over $89,075 ($178,150 for married couples filing jointly)
- 22% for incomes over $41,775 ($83,550 for married couples filing jointly)
- 12% for incomes over $10,275 ($20,550 for married couples filing jointly)
- 10% for incomes of $10,275 or less ($20,550 for married couples filing jointly)
Married filing separately pay at same rate as unmarried. Source: Internal revenue Service
2022 Capital Gains Tax Rates
| Tax-filing status | Single | Married, filing jointly | Married, filing separately | Head of household |
| 0% | $0 to 41,675 | $0 to $83,350 | $0 to $41,675 | $0 to $55,800 |
| 15% | $41,676 to $459,750 | $83,351 to $517,200 | $41,676 to $258,600 | $55,801 to $488,500 |
| 20% | $459,751 or more | $517,201 or more | $258,601 or more | $488,501 or more |
For more information contact Mary Ford at mary.ford@sobelcollc.com
