2021 Tax Law Changes – Individuals

Each calendar year provides unique challenges and updates to tax law impacting businesses and individuals. This post will highlight some of the major changes for individuals. If you wish to see tax law changes affecting businesses, you can go here.

Article Highlights

• Economic Impact Payments – Third Round
• Educator Expenses
• Charitable Contributions for Non-Itemizers
• Charitable Contributions for Itemizers
• Child Tax Credit
• Child & Dependent Care Credit
• Earned Income Tax Credit
• Premium Tax Credit
• Education Credits
• Dependent Care Assistance Plans
• Cryptocurrency Reporting
• Student Loan Discharge
• Student Loan Relief
• New Above-the-Line Deductions
• Pell Grants
• Unemployment Benefits
• Net Investment Income Tax
• Surcharge on High-Income Taxpayers
• Required Minimum Distributions (RMDs) and COVID Distributions
• The Home Office Deduction
• IRS Processing Challenges

On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA) into law. The CAA contained two other laws:

• COVID-Related Tax Relief Act of 2020 (COVIDTRA) and
• Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR).

Though signed into law in 2020, many of the provisions from the CAA affect the 2021 tax year, as well.

The American Rescue Plan Act (ARPA) was signed into law by President Biden on March 11, 2021. This legislation provides substantial aid to individuals by expanding the benefits for the Child Tax Credit, Child & Dependent Care Credit, and Earned Income Tax Credit.

In April 2021, President Biden released a fact sheet for the American Families Plan and the Made in America Tax Plan that included sweeping reforms to both individual and business taxation. The latest version of the proposed legislation, called the Build Back Better Act (BBBA), was released on November 19, 2021. Most of the intended reforms favor low-income individuals and target high-income individuals. The BBBA has not officially been signed into law as of the date of this writing, with many of its provisions to take effect in tax year 2022 or later.

President Biden signed into law The Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021. The legislation includes important tax-related provisions, though not near as many as what the BBBA contains. The most notable provisions of the IIJA include changes to the Employee Retention Credit (to be discussed in the business blog post) and cryptocurrency reporting requirements.

This post provides an overview of some of the tax provisions in these legislations that will affect individual tax returns in the current tax year (2021) and future tax years.

Economic Impact Payments – Third Round

The CAA released three rounds of economic impact payments (EIP), which are also referred to as “stimulus payments.” The first round (issued around April 2020 – May 2020) and second round (issued around December 2020 – January 2021) of stimulus payments affected the 2020 tax year and were reported on Notices 1444 and 1444-B, respectively.

Similarly, the third round of stimulus payments were reported to taxpayers on Notice 1444-C. Most taxpayers received this notice around March or April of 2021. If a taxpayer received less than the maximum allotted for the third stimulus, Letter 6475 should arrive in January 2022 to detail how much was received. In order to appropriately calculate any remaining credit you might be eligible for, it will be important for you to provide copies of these notices to us when submitting information for your 2021 tax return.

The third round of payments were $1,400 per eligible individual and $2,800 for married couples filing a joint return, plus $1,400 for eligible dependents. The payments were based on Adjusted Gross Income (AGI) as filed on the 2019 or 2020 tax return, as applicable.

See below for rebate amounts and phaseout ranges based on AGI:

If the actual credit is higher than what was received (meaning the IRS did not send you enough), you will receive the difference as a refundable tax credit on your 2021 tax return. These recovery rebates are an advance of a refundable tax credit that will be calculated on the 2021 tax return. The actual credit amount will be determined based on your 2021 AGI and number of eligible dependents claimed. Once the actual credit amount is calculated on the 2021 tax return, it will need to be compared to the payments that were actually received during round three. 

If the actual credit happens to be less than what was received, (meaning the IRS sent you too much), you will not have to pay the difference back. You just won't have any additional tax credit to claim on the 2021 tax return.

Resources for more information:

• "Get My Payment" to check the status of your payment and how it was sent to you. 
• Information about the third round of payments, “Third Economic Impact Payment”.

 Educator Expenses

Similar to the 2020 tax year, the CAA entitles eligible K-12 teachers and instructors to a $250 annual above-the-line deduction for certain school-related expenses paid out-of-pocket.

The CAA specifies that the $250 deduction includes personal protective equipment (PPE), disinfectant, and other supplies used for the prevention of the spread of COVID-19.

Charitable Contributions for Non-Itemizers

In 2020, the CARES Act allowed non-itemizers to deduct $300 of cash contributions, regardless of filing status. The CAA 2021 extended the $300 above-the-line deduction through 2021, and also increased the deduction to $600 for married filing joint taxpayers. In addition, CAA 2021 extended the suspension of the 60% limit on cash contributions, which now enables taxpayers to deduct cash contributions of up to 100% of their AGI. Please note that a 50% underpayment of tax penalty could be assessed in instances where contributions cannot be properly documented.

Charitable Contributions for Itemizers              

Thanks to the CARES Act and CAA 2021 extension, taxpayers who itemize their deductions in 2021 will not have a 60% AGI limit applied to their charitable contributions, as long as the charitable donation is made to an IRS-approved charity.

Child Tax Credit

ARPA significantly expanded the Child Tax Credit (CTC) for the 2021 tax year by increasing the maximum CTC amount, creating advanced CTC payments, and making the CTC fully refundable. If enacted, the BBBA would extend the refundability provision to the 2022 tax year, as well. It should be noted that the $500 credit for other dependents remains nonrefundable in 2021. ARPA also temporarily expanded the definition of a “qualifying child” in 2021 to include children who have not turned age 18 by the end of 2021; this means that 17-year-old children now qualify for the CTC in the 2021 tax year.

ARPA significantly increased the maximum CTC allotted to each qualifying child for the 2021 tax year. For children ages 6 and above, the credit has been increased to $3,000. For children under the age of 6, the credit has increased to $3,600. To accommodate the increased CTC, two phaseouts based on AGI will be applied in 2021. The first phaseout ratably decreases the CTC $50 for each $1,000 over the applicable threshold to a minimum credit of $2,000, as long as the taxpayer’s AGI is below $200,000 ($400,000 for married filing joint statuses). The second phaseout begins at $200,000 ($400,000 for married filing joint statuses) and ratably decreases the remaining $2,000 CTC down $50 for each $1,000 over the applicable threshold.

See below for credit amounts and phaseouts based on AGI...

Advanced Child Tax Credit payments began in July 2021. Unless taxpayers un-enroll from these advances (note that re-enrolling is not an option at this time), these payments may continue to be paid out in advance to families during the 2022 tax year if the BBBA is signed into law. For the 2021 tax year, the advanced payments received should have equaled half of the taxpayer’s anticipated child tax credit for the year, with the other half to be claimed when the 2021 income tax return is filed. The ARPA provides a repayment safe harbor that may protect taxpayers under certain AGI thresholds from repaying any portion of advanced payments received. The IRS website has many useful topics that discuss the CTC and Advanced Child Tax Credit payments.

Advanced Child Tax Credit payments received during 2021 will be reported to taxpayers on Letter 6419, which is expected to be mailed in January 2022. In order to appropriately calculate any remaining credit you might be eligible for, it will be important for you to provide copies of these letters to us when submitting information for your 2021 tax return.

Child & Dependent Care Credit

ARPA considerably adjusted the Child & Dependent Care Credit by making it 100% refundable (similar to the child tax credit), increasing the expense limit, and enormously raising the AGI threshold to be eligible for the credit. In order to qualify for the credit, taxpayers must still have “earned income” (i.e. Wages, salaries, or net earnings from self-employment) and the “qualifying person” must be a dependent of the taxpayer that is under age 13.

Under ARPA, the expense limit has increased from $3,000 to $8,000 for one qualifying individual, and from $6,000 to $16,000 for two or more qualifying individuals. The credit percentage has also increased from 35% to 50%. In addition, the initial AGI threshold has been raised from $15,000 to $125,000. This all implies that if a taxpayer with earned income and AGI below the threshold has one qualifying individual and at least $8,000 of childcare expenses incurred during 2021, they could be entitled to a $4,000 credit. Similarly, if a taxpayer with earned income and AGI below the threshold has two or more qualifying individuals and at least $16,000 of childcare expenses, they could be entitled to an $8,000 credit.

Earned Income Tax Credit

Sweeping reforms related to the Earned Income Tax Credit (EITC) have taken place under ARPA. One impactful change is that the age requirement has been lowered from 25 years old to 19 years old (unless the individual is a student, qualified former foster youth, or qualified homeless youth). In addition, ARPA removed the maximum age limit of 65 to claim the EITC.

Historically, taxpayers with investment income in excess of $3,650 were disqualified from claiming the credit. For tax year 2021, the investment income threshold has been raised to $10,000. In addition, ARPA allows taxpayers to substitute their 2019 earned income for their 2021 earned income for purposes of determining EITC eligibility. This could produce larger credits for eligible taxpayers who earned lower wages due to the pandemic.

Premium Tax Credit

ARPA changed the affordability percentages for Premium Tax Credits (PTC) for the 2021 and 2022 tax years to increase credits available to individuals with income over 400% of the Federal Poverty Line. In 2020, ARPA did not require taxpayers to repay excess advance PTC payments received; no such guarantee has been made for the 2021 tax year as of the date of this writing.

The BBBA aims to extend PTC eligibility to taxpayers with income over 400% of the Federal Poverty Line through tax year 2025. The BBBA also intends to exclude Social Security benefits and certain dependent income from household income used to determine PTC eligibility. Finally, the legislation plans to make it so individuals receiving unemployment compensation are treated as though their income is no higher than 150% of the Federal Poverty Line, and thus make the PTC more attainable for these individuals.

Education Credits

The Tuition and Fees Deduction, an above-the-line deduction, has not been extended to the 2021 tax year. However, students can still take advantage of other education credits, including the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC). In 2021, the LLC phaseout ranges based on AGI will be increased, since the Tuition and Fees Deduction has been eliminated: $59,000 - $69,000 for single filers, $118,000 - $138,000 for joint filers. The 2021 AOTC phaseout ranges are: $80,000 - $90,000 for single filers, $160,000 - $180,000 for joint filers.

The AOTC is a $2,500 partially refundable credit available on a per student basis in their first four years of postsecondary education, whereas the LLC is a $2,000 nonrefundable credit afforded on a per return basis at any point of a student’s educational journey. The same student cannot claim both the AOTC and LLC. In addition, the AOTC requires a student to be enrolled at least half-time at an educational institution and actively enrolled in a degree program, whereas the LLC does not impose these stipulations. Navigate to the IRS website to see a useful comparison chart for the LLC and AOTC.

Dependent Care Assistance Plans

A Dependent Care Assistance Plan (DCAP) allows employees to be reimbursed for dependent care expenses so that the employees and their spouses may work, look for work, or attend school full time. The DCAP is set up through a Flexible Spending Account (FSA), and the employee elects to contribute pre-tax dollars from their paycheck over the course of the year to pay for qualifying dependent care expenses.

ARPA increased the dollar limitation to be reimbursed to employees in 2021 and 2022 from $5,000 to $10,500 for married couples filing jointly. Note that employers are not required to implement the increased limitations, but they may do so by the last day of the plan year. Also note that any assistance provided above the annual maximum amounts is included in the employee’s taxable income. Many households found that they were unable to use money set aside in their DCAP FSA due to COVID-19, so CAA 2021 also provided that DCAP FSAs may carry over unused benefits up to the full limitation amount from 2020 to 2021 and from 2021 to 2022.

Cryptocurrency Reporting

As virtual currencies become more commonly invested in by everyday taxpayers, the IRS is stepping up its reporting requirements for the buying or selling of these digital assets. Under IIJA, these cryptocurrency transactions will now be captured and reported on Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, as this is the form traditionally used by brokers to report short- and long-term capital gains from the sale of intangible assets.

As shown below, you must answer the following question on Form 1040: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?

If your only transaction involving virtual currency during 2021 were purchases of virtual currency for real currency, including the use of real currency electronic platforms such as PayPal and Venmo, you are not required to check the "Yes" box next to the virtual currency question.

If you disposed of any virtual currency that was held as a capital asset through a sale, exchange, or transfer, check "Yes" and use Form 8949 to determine your capital gain or loss and report it on Schedule D (Form 1040).

Student Loan Discharge

Historically, cancellation of debt (COD) income is deemed taxable in the year the cancellation occurs. This COD income is typically reported on Form 1099-C, Cancellation of Debt. COD income usually included discharged student loan debts, unless the student loan was cancelled due to death, total or permanent disability, or other stringent situations.

ARPA expanded the student loan debt exclusion from COD income to include discharges from (1) private education loans or (2) loans for postsecondary education if the loan was made, insured, or guaranteed by the United States, state, or local governmental jurisdiction or eligible educational institution. Please note that if the discharge of the student loan is due to services performed for an educational institution or private education lender, the student loan will be taxed as COD income. This provision applies to tax years 2021 through 2025.

Student Loan Relief

Countless individuals are struggling to pay student loan debt since the onset of COVID-19. The CARES Act responded by allowing employers to contribute up to $5,250 annually toward an employee’s student loans. These payments are excluded from the employee’s income. Eligible student loan repayments include payments made by the employer toward the principal or interest of any qualified higher education loan, whether the payment is completed by the employee or employer to the lender. CAA 2021 extends the exclusion of employer payments on student loan debt from employee gross income through tax year 2025.

New Above-the-Line Deductions

(1)   Union Dues: For tax years 2022 through 2026, the BBBA proposes to provide an above-the-line deduction for up to $250 of union dues incurred during the year.

(2)   Employee Uniforms: The BBBA intends to create an above-the-line deduction for up to $250 paid out-of-pocket during the year for employee uniforms for tax years 2022 through 2024. The uniform must be specific to the taxpayer’s place of employment and unsuitable for everyday wear.

Pell Grants

Under current law, individuals that receive scholarships, including Pell Grants, must include in taxable income any portion of the financial aid not used to pay for qualified tuition and fees. If BBBA legislation is passed, any amount received from a Pell Grant would be excludible from income, regardless of whether the proceeds are used for tuition and related expenses. The proposed changes to Pell Grant taxation currently impact tax years 2022 through 2025.

Unemployment Benefits

Unemployment benefits are traditionally taxable to recipients. ARPA made $10,200 unemployment benefits non-taxable for taxpayers with an AGI below $150,000 during 2020. This unemployment income exclusion has not been extended to 2021 as of the date of this writing. Many taxpayers continue to receive unemployment benefits; if taxpayers have not done so yet, it is highly recommended that they withhold taxes from unemployment benefits going forward to avoid owing a large tax bill when filing income tax returns. To withhold a flat 10%, Form W-4V, Voluntary Withholding Request, would need to be filed.

Increased federal unemployment benefits continued through September 6, 2021. But it is worth mentioning that numerous states, including Missouri, have done away with providing any pandemic-related increases in unemployment benefits.

Net Investment Income Tax

Under current law, a 3.8% Net Investment Income Tax (NIIT) on passive activity income for taxpayers with an AGI greater than certain thresholds [ Joint filers $250,000, Single or Head of Household filers $200,000 ]. The BBBA proposes to apply an “expanded NIIT” to certain high-income taxpayers, regardless of whether they materially participate in an activity or not (effectively bypassing the requirement that the tax would apply only to passive income). The BBBA establishes a term “specified net income” to apply the expanded NIIT to, which encompasses “income derived in the ordinary course of a trade or business without regard to the current limitation that the trade or business is a passive activity.” If enacted, the expanded NIIT would apply to individuals in tax years 2022 and beyond with an AGI above:

• $500,000 for Joint filers
• $400,000 for Head of Householder filers
• $250,000 for Single filers

Surcharge on High-Income Taxpayers

The BBBA aims to enact a 5% income tax surcharge and then an additional 3% income tax surcharge (for a total of 8% tax) on AGIs above certain thresholds.  

The provision would be effective for tax years 2022 and beyond.

 Required Minimum Distributions

In 2020, taxpayers were not required to take a minimum distribution from their retirement accounts, however, the suspension terminated as of 2021. RMDs apply to IRA's, SEP IRAs, SIMPLE IRAs, and 401(k), Roth 401(k), 403(b) and 457(b) plans.

Roth IRAs do not require distributions while the original owner is alive.

A 2020 coronavirus-related distribution may be repaid over a 3-year period or have the taxes due on the distribution spread over three years. The distribution is not subject to the 10% penalty. Use Form 8915-F to report coronavirus-related distributions and repayments.

The Home Office Deduction

W2 employees working from home as a result of COVID-19 or otherwise cannot claim a home office deduction nor deduct costs as an unreimbursed employee business expense.

Self-employed individuals, sole proprietors, and single member LLCs who own or rent and file Schedule C generally can claim the home office deduction.

There are two options for determining the home office deduction on Form 8829:

• The "regular method" allocates actual expenses of operating the home between personal and business use based on the square footage (e.g., rent, mortgage interest, insurance, utilities, internet, property taxes, condo fees) to determine the business usage percentage.
• The "simplified method" uses a rate of 5 per square foot for business use of the home. The maximum deduction is $1,500.

IRS Processing Challenges

• 
  To ensure the best possibility of timely processing, e-file and pay electronically and set refunds for direct deposit.
• Wait times for calls and responses to correspondence are expected to be significant. Alternatively, visit the IRS website to determine whether a question or issue can be resolved.
• File extension electronically in advance of deadline and verify acceptance.
• Utilize IRS website tools for tracking refunds, ordering transcripts, establishing payment plans to the greatest extent possible.

The Tip of the Iceberg

As you can see there is no shortage of new tax law for individual taxpayers this year, and we have covered only a few of them.  Our team is honing our skills for tax season to make sure you can know these laws at arms length while we take care of the dirty work.  If you have any questions about the information discussed here just drop us a line.

For the latest tax updates be sure to follow us on Twitter, Facebook and LinkedIn. You can also visit our website at https://arndtcpas.com or give us a call at (417) 882-9000.