J.K. Lasser’s Your Income Tax 2022
Tax News for 2021
J.K. Lasser’s Your Income Tax 2022 | xxvii
What’s New for 2021
Some of the tax changes for 2021 noted below were provided by the American
Rescue Plan Act of 2021 (ARPA), such as the third round economic impact
payment (EIP 3), recovery rebate credit, increases to the child tax credit and
child and dependent care credit, and expanded premium tax credit.
For an update on tax developments and a free download of the
e-Supplement to this book, visit us online at jklasser.com.
Tax News for 2021
Economic impact payments Stimulus payments are tax free. If you received a third-round Economic Impact Payment (EIP3)
and your adjusted gross income in 2021 is less than it was in 2020 or 2019 (whichever year
was used to figure the payment), you may be eligible for a recovery rebate credit (25.19)
Unemployment benefits These benefits are fully includible in gross income; there is no exclusion for benefits received
in 2021 (2.5).
Tax rate brackets and
preferential rates for capital
The rate brackets for 2021 ordinary income remain at 10%, 12%, 22%, 24%, 32%, 35%
and 37%, but the taxable income amounts in each bracket have changed. The top bracket of
37% for 2021 applies if taxable income exceeds $523,600 for single taxpayers and heads of
households, $628,300 for married persons filing jointly and qualifying widows/widowers, and
$314,150 for married taxpayers filing separate returns (1.2).
Qualified dividends (4.2) and long-term capital gains (5.3) may escape tax entirely under
the 0% rate, or be subject to capital gain rates of 15% or 20% depending on filing status,
taxable income, and how much of the taxable income consists of qualified dividends and
eligible long-term gains (5.3). The 20% capital gain rate applies in 2021 when taxable income
exceeds $445,850 for singles, $473,750 for heads of households, $501,600 for married
persons filing jointly and qualifying widows/widowers, and $250,800 for married persons filing
separately. The 0%, 15%, and 20% rates do not apply to long-term gains subject to the 28%
rate (collectibles and taxed portion of small business stock) or the 25% rate for unrecaptured
real estate depreciation (5.3).
Retirement plan loans and
Distributions from qualified retirement plans and IRAs, which were waived for 2020, must
commence for 2021 by those who attained the required starting date or who have inherited
accounts (7.11, 8.13).
COVID-19-related distributions may be repaid within 3 years, so a repayment in 2021
means filing an amended return to recoup taxes paid on the 2020 distribution (7.28, 8.27).
Education-related tax breaks Educator expenses of up to $250 include the cost of personal protective gear and other
COVID–19-related safety measures (12.2). The tuition and fees deduction expired at the end
of 2020 and was not extended; it does not apply for 2021. The modified adjusted gross limits
for the lifetime learning credit have been aligned with the limits for the American opportunity
credit (33.8, 33.9).
Standard deductions The basic standard deduction for 2021 (13.1) is $25,100 for married persons filing jointly
and qualifying widows/widowers, $18,800 for heads of households, or $12,550 for single
taxpayers or married persons filing separately.
The additional standard deduction (13.4) for being 65 or older or blind increases to $1,700
if single or head of household ($3,400 if 65 and blind). If married filing jointly, the additional
standard deduction increases to $1,350 if one spouse is 65 or older or blind, $2,700 if both
spouses are at least 65 (or one is 65 and blind, or both are blind and under age 65).
The standard deduction can be increased by a net disaster loss deduction (13.1).
Non–itemizers can also deduct cash contributions to charity up to $300 ($600 on a joint return;
see next item)
Charitable contributions Non-itemizers can deduct cash contributions in 2021 up to $300 ($600 on a joint return) (12.2).
Individuals who itemize deductions can elect to deduct cash contributions up to 100% of
adjusted gross income (14.17).
Self-employment tax and
deduction for portion of self-
employment tax; Social Security
For 2021, the tax rate on the employee portion of Social Security is 6.2% on wages up to
$142,800, so Social Security tax withholdings should not exceed $8,853.60. Medicare tax of
1.45% is withheld from all wages regardless of amount.
On Schedule SE for 2021, self-employment tax applies to earnings of up to $142,800; only
92.35% of earnings are taken into account. The 15.3% rate equals 12.4% for Social Security
(6.2% employee share and 6.2% employer share) plus 2.9% for Medicare. If net earnings
exceed $142,800 (after the reduction), the 2.9% Medicare rate applies to the entire amount
One-half of the self-employment tax may be claimed as an above-the-line deduction on
Schedule 1 of Form 1040 or 1040-SR (45.3–45.4).
If an election was made in 2020 to defer the employer portion of Social Security taxes,
which is part of self-employment tax, then 50% of the deferred amount must be paid by
December 31, 2021.
IRA and Roth IRA contribution
phaseout; rollover limits
The age cap on contributing to a traditional IRA has been repealed. Contributions to a traditional
IRA for 2021 can be made as long as you have earned income (or other eligible income) (8.2).
While the contribution limits for traditional IRAs and Roth IRAs are unchanged for 2021, the
deduction limit for 2021 contributions to a traditional IRA is phased out (8.4) for active plan
participants with modified AGI (MAGI) between $66,000 and $76,000 for a single person or
head of household, or between $105,000 and $125,000 for married persons filing jointly and
qualifying widows/widowers. The phaseout range is MAGI between $198,000 and $208,000
for a spouse who is not an active plan participant and who files jointly with a spouse who is
an active plan participant.
The 2021 Roth IRA contribution limit is phased out (8.21) for a single person or head of
household with MAGI between $125,000 and $140,000, and for married persons filing jointly
and qualifying widows/widowers with MAGI between $198,000 and $208,000.
Qualified business income
If you are a sole proprietor or have an interest in a partnership, limited liability company, or
S corporation, you may be eligible for a deduction of up to 20% of qualified business income
(40.24). This deduction is a personal deduction, not a business deduction, and can be claimed
whether you itemize or take the standard deduction. The taxable income amounts used to
figure the deduction for 2021 have been increased for inflation.
First-year expensing For qualifying property placed in service in 2021, first-year expensing (42.3) is allowed up to
a limit of $1,050,000, and the limit begins to phase out if the total cost of qualifying property
exceeds $2,620,000 (42.3).
IRS mileage allowance The IRS standard business mileage rate for 2021 is 56 cents a mile (43.1).
The rate for medical expense (17.9) and moving expense for certain military personnel
(12.3) deductions is 16 cents a mile.
For charitable volunteers (14.4), the mileage rate is unchanged at 14 cents a mile.
Vehicle depreciation limit For a vehicle placed in service in 2021 and used over 50% for business, the first-year
depreciation limit using bonus depreciation is $18,200. However, if you elect not to have bonus
depreciation apply, or you are not eligible for the bonus, the first-year depreciation limit is
Health savings accounts (HSAs) The definition of a high-deductible health plan, which is a prerequisite to funding an HSA,
means a policy with a minimum deductible for 2021 of $1,400 for self-only coverage and a
maximum out-of-pocket cap on co-payments and other amounts of $7,000. These limits are
doubled for family coverage ($2,800/$14,000) (41.10).
The contribution limit for 2021 is $3,600 for self-only coverage and $7,200 for family
coverage (41.11). Those age 55 or older and not yet on Medicare can add an additional $1,000.
Adoption expenses For 2021, the limit on the adoption credit as well as the exclusion for employer-paid adoption
assistance is $14,440. The benefit phaseout range is modified adjusted gross income between
$216,660 to $256,660 (25.9).
Child tax credit For 2021, the child tax credit is up to $3,600 for a qualifying child from birth to under age 6
and up to $3,000 for a child age 6 to under age 18; it is fully refundable (25.2). One half of the
credit amount was paid monthly from July through December 2021. You must reconcile the
advance payment with the amount to which you are actually entitled, based on income in 2021,
when you file your 2021 return (25.3). The credit for other dependents is unchanged (i.e., not
refundable and limited to $500 per dependent) (25.4).
Dependent care credit and
For 2021, the child and dependent care credit is greatly increased and fully refundable (25.5).
Qualifying expenses taken into account in figuring the credit are $8,000 for one qualifying
individual and $16,000 for two or more qualifying individuals. There is a two-tier phaseout
of the credit based on income, with high-income individuals ineligible for any credit. The
exclusion for dependent care under an employer’s dependent care assistance plan is $10,500
($5,250 if married filing separately).
Earned income tax credit For 2021, the maximum credit amount is $3,618 for one qualifying child, $5,980 for two
qualifying children, $6,728 for three or more qualifying children, and $1,502 for taxpayers
who have no qualifying child (25.7). The ages for claiming the credit without any qualifying
child have changed. The phaseout ranges for the credit have been adjusted for inflation (25.8).
Premium tax credit For 2021, the premium tax credit is allowed even if household income exceeds 400% of the
federal poverty line. The required contribution percentages are reduced (25.13).
Alternative minimum tax (AMT)
exemption and tax brackets
The AMT exemptions, exemption phaseout thresholds, and the dividing line between the 26%
and 28% AMT brackets are adjusted for inflation. The 2021 AMT exemptions (prior to any
phaseout) are $114,600 for married couples filing jointly and qualifying widows/widowers,
$73,600 for single persons and heads of households, and $57,300 for married persons filing
separately. See 23.1 for exemption phaseout rules and AMT calculation details.
All nonrefundable personal credits for may be claimed against the AMT as well as the
regular tax (23.3).
Eligibility for saver’s credit The adjusted gross income brackets for the 10%, 20%, and 50% credits are increased
for 2021. No credit is allowed when AGI exceeds $33,000 for single taxpayers, $49,500
for heads of households, and $66,000 for married persons filing jointly. ABLE account
contributions can qualify for the credit (25.12).
Deduction limits for long-term
The maximum amount of age-based long-term care premiums that can be included as
deductible medical expenses for 2021 (subject to the AGI floor; see 17.1 ) is $450 if you are
age 40 or younger at the end of 2021; $850 for those age 41 through 50; $1,690 for those age
51 through 60; $4,520 for those age 61 through 70; and $5,640 for those over age 70 (17.15).
Foreign earned income and
The maximum foreign earned income exclusion for 2021 is $108,700 (36.1). The limit on
housing expenses that may be taken into account in figuring the housing exclusion is generally
$32,610, but the limit is increased by the IRS for high cost localities (36.4).
Annual gift tax exclusion; gift tax
and estate tax exemption
The annual gift tax exclusion remains at $15,000 per donee for 2021 gifts of cash or present
interests (39.2). The basic exemption amount for 2021 gift tax and estate tax purposes
increases to $11,700,000 (39.4, 39.9). The top tax rate remains at 40% (39.9).
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