How Will COVID-19 Affect Your 2021 Individual Income Taxes?
The economic impacts of COVID-19 continue to affect the “bread and butter” of individuals and families across the nation. The Bureau of Economic Analysis (BEA) published data showing an annual personal income rate increase of nearly 60% in the first three months of 2021; however, that spike can be attributed largely to the influx of government social benefits such as recovery rebate checks and credits available to claim on their individual income taxes. The BEA’s data from May alone shows a $414.3 billion decrease in personal income.
The prices of many goods are not on a parallel decline, unfortunately. The US Bureau of Labor Statistics reported, as of May 2021, food prices were up 2.2% compared to May of last year, and gasoline prices were up by 56.2%. Maintaining your household finances in an uncertain economy is challenging enough. When you add COVID-19 relief provisions and the rapid-fire changes to tax laws to the mix, it becomes difficult to know which side your bread is buttered on. Here is a look at what’s ahead for 2021 individual income taxes, including possible benefits and implications related to COVID-19.
Some COVID-19 relief provisions have come and gone, while others are set to expire soon.
For example, individuals and families are not likely to see a fourth round of stimulus checks, and federal expanded unemployment benefits are set to expire on September 6, 2021. The foreclosure moratorium for federally backed mortgages expired on July 31, 2021, but the moratorium on evictions for borrowers and their occupants has been extended through September 30, 2021.
State-level relief varies according to each state’s laws. According to the Massachusetts DOR’s June 2021 News, the temporary rules for individual income taxes in place for residents teleworking outside of Massachusetts and non-residents teleworking within the Commonwealth due to COVID-19 will expire on September 13, 2021.
Several COVID-19 relief provisions remain in effect for 2021.
Charitable Contributions
Taxpayers who itemize when filing their 2021 individual income taxes may elect to deduct up to 100% of their AGI for cash contributions made in 2021.
The maximum deduction for a married couple filing jointly and not itemizing in 2021 is now $600.
Medical Expenses
The Consolidated Appropriations Act (CAA) made the current medical expense deduction floor permanent.
Individuals may deduct unreimbursed medical expenses in excess of 7.5% of their adjusted gross income in 2021 and beyond.
Amounts paid for personal protective equipment (PPE) used to prevent the spread of COVID-19 are now treated as deductible medical care expenses.
Education Expenses
The lifetime learning credit remains available to offset the cost of undergraduate, graduate and professional degree courses of up to $2,000 on your 2021 return.
The increased phaseout limits are effective for tax years beginning after December 31, 2020.
The temporary provisions suspending student loan payments, setting interest rates at 0%, and stopping collections on defaulted loans were set to expire on September 30, 2021; however, these provisions have been extended to January 31, 2022.
The American Rescue Plan Act enhanced certain tax credits for 2021 only.
Child Tax Credit (CTC) for 2021
The CTC is fully refundable.
The credit amount is $3,000 per child/$3,600 for a child under six.
Any excess amount (over the original credit of $2,000) is subject to phaseout rules based on income.
Advance payments started in July and will continue through the end of the year for up to half of the anticipated credit for 2021.
The remainder will be claimed on the taxpayer’s 2021 individual income taxes filed in 2022.
Child & Dependent Care Tax Credit (CDCTC) for 2021
The CDCTC is fully refundable.
The amount of eligible qualifying expenses is $8,000 for one qualifying dependent and $16,000 for two or more.
The credit will be worth 50% of eligible expenses (up to a limit based on income).
Earned Income Tax Credit (EITC) for 2021
For eligible individuals without qualifying dependents:
There is no maximum age.
The applicable minimum age is 19 in general, 24 for full-time students, and 18 for qualified former foster or homeless youth.
The credit percentage and phase-out percentage increase to 15.3%.
The maximum earned income amount increases to $9,820.
The phaseout threshold for non-joint filers increases to $11,610 ($17,550 if married filing jointly).
Premium Tax Credit for 2021
Enhanced marketplace subsidies are available for 2021 for taxpayers who received or were approved for unemployment compensation during 2021.
Affordability percentages have been temporarily modified for 2021 and 2022.
The CAA extended certain existing tax credits and provisions that were set to expire.
The following credits and provisions have been extended through 2021:
The following credit has been extended through 2022:
The following tax provisions have been extended through 2025:
The IRS has a full listing of tax credits available for businesses and self-employed individuals and tax credits and deductions available for individuals.
Before making significant changes and investments, taxpayers should consider the possible effects on their individual income taxes, based on brackets and rates in 2021.
Contact Livingston & Haynes
L&H helps individuals and affluent families meet their collective financial goals, navigate the intricacies of estates, trusts, and retirement, and address the accounting, tax, and bookkeeping needs of their family offices, privately held companies, charitable foundations, and other related ventures.
We want to help you separate the wheat from the chaff, as they say, so that you can leverage the tax relief opportunities available to you. Let’s create a strategy to lower your tax exposure, support your business endeavors, and protect your wealth. Contact us today.
by Steven J. Haynes, MBA
Steven J. Haynes is an administrative partner at Livingston & Haynes and specializes in bookkeeping, payroll, and business advisory services for privately held businesses, including construction firms. Steve’s firm, Emerging Business Partners (EBPI), became an affiliate of L&H in 2007. EBPI was founded in September 1992, and, today, broadens the bookkeeping, payroll, and tax consulting services available to L&H clients.