2021 Year-End Tax Planning for Individuals
What a whirlwind these last two years have been … or should we just consider them one long year? With extensive COVID-19 relief legislation, it’s been challenging keeping up with changes, but rest assured we’re here for you! While not an exhaustive list, below is a summary of some provisions in effect for the 2021 tax year. Please reach out to your BKD Trusted Advisor™ for more information on how these items may affect your personal tax situation.
Above-the-Line Charitable Contribution Deduction – For 2021, taxpayers who don’t itemize can take advantage of a $300 above-the-line deduction for cash contributions to qualified charitable organizations ($600 for married filing jointly).
Increased Limit for Cash Contributions – The adjusted gross income (AGI) limit for cash contributions made to qualified charities has been increased to 100 percent through 2021. Donations to donor-advised funds and private foundations are not eligible for the increase. Further analysis should be made when donating both cash and noncash contributions, such as stock, or if the taxpayer is in a lower tax bracket or doesn’t otherwise itemize.
Required Minimum Distributions (RMD) – RMDs have resumed for the 2021 tax year and must be taken by December 31 unless the taxpayer turned age 72 during the year which defers the start date to April 1. Taxpayers at least age 70 and a half should consider making qualified charitable distributions (QCD)—of up to $100,000 per year—directly from a non-Roth IRA to a qualified charity to reduce AGI. QCDs count toward RMDs.
Child Tax Credit (CTC) – For eligible taxpayers in 2021, the CTC was increased and became fully refundable. The credit was increased by $1,600 for children under age 6 and by $1,000 for those ages 6 to 17. The increase starts to phase out for joint filers and qualifying widow(er)s with AGI of more than $150,000 ($112,500 head of household, $75,000 for all other taxpayers). The phaseout for the increase is calculated separately from the phaseout for the base $2,000 per child credit.
To allow families an immediate benefit, six advanced monthly payments of the credit started in July. The advanced payments are based on either the 2019 or 2020 tax return. The payments do not exceed more than 50 percent of the projected CTC and are up to $300 per month for each qualifying child under age 6 and up to $250 per month for children ages 6 to 17. There are certain tax situations where it’s more beneficial for the taxpayer to opt out of the advanced payments. Read BKD Thoughtware® article “Important Changes Made to the 2021 Child Tax Credit” for more details.
Qualified Medical Expenses – Personal protective equipment (PPE) purchased to prevent the spread of COVID-19 qualifies as medical expenses starting periods beginning on or after January 1, 2020. Items such as masks and hand sanitizer are now eligible to be paid, or reimbursed, under medical expense accounts such as FSAs, HRAs, HSAs, and MSAs. If a medical expense account is not used, and the items are not reimbursed by insurance, the costs can be included as a deductible medical expense. Deductible medical expenses must exceed 7.5 percent of the taxpayer’s AGI and the taxpayer must itemize to receive a benefit. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law in March 2020 also made over-the-counter medications and menstrual care products qualified medical expenses.
Repayment of Deferred Social Security Tax – 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 by 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.
Net Operating Losses (NOL) – For most taxpayers, NOLs can only offset 80 percent of taxable income in a tax year. Any remaining NOL is carried forward indefinitely. There is an exception for farm losses, which are eligible for a two-year carryback. NOLs arising in tax years prior to January 1, 2018, were limited to a 20-year carryforward, so taxpayers having NOLs from these years will need to track them separately. The CARES Act temporarily changed the NOL carryback rules for tax years 2018, 2019, and 2020.
Excess Business Losses – Noncorporate taxpayers can 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 Form 4797 may be included in the loss calculation. However, W-2 wages are not considered business income in calculating the excess business loss. Any excess loss becomes an NOL and is carried forward to future tax years.
For more information, reach out to your BKD Trusted Advisor or use the Contact Us form below.