Tax Tips from Tax & Accounting Plus – Part 5

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HOT FOR 2021

CARES Act, The American Rescue Plan Act and The Consolidated Appropriations Act.  There are many changes for 2021 due to these bills that were passed.  Some are good and some are bad.  To help you get organized and not miss any new credits or deductions, we are highlighting some of the key changes to help you get a bigger refund.  If you should have any questions or need further explanation, please do not hesitate to call us at              309-827-4010.

Tax Rates.  There are seven individual income tax brackets for tax year 2021: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.  These tax rates are dependent upon taxable income and filing status.

Standard Deduction.  The standard deduction is a dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. The standard deduction reduces the income subject to tax. The TCJA nearly doubled standard deductions. When you take the standard deduction, you can’t itemize deductions for mortgage interest, state taxes and charitable deductions on Schedule A, Itemized Deductions.

The standard deduction for each filing status is: 20212022
Single (S) $12,550 $12,950
Married filing jointly (MFJ) or Qualifying widow(er) (QW) $25,100 $25,900
Married filing separately (MFS) $12,550 $12,950
Head of Household (HOH) $18,800 $19,400

The amounts are higher if you or your spouse are blind or over age 65 (event). You will receive an additional $1,700 for each person and each “event” if your filing status is Single or Head of Household.  You will receive an additional $1,350 for each “event” if your filing status is Married Filing Joint or Qualifying Widow(er).  Most taxpayers have the choice of either taking a standard deduction or itemizing. If you qualify for the standard deduction and your standard deduction is more than your total itemized deductions, you should claim the standard deduction.

Changes to Itemized Deductions.  In addition to nearly doubling standard deductions, the TCJA changed several itemized deductions that can be claimed on Schedule A, Itemized Deductions.

You may not take the standard deduction if you claim itemized deductions. Alternatively, if you take the standard deduction, you may not claim itemized deductions. For married filing separate taxpayers, if one spouse elects to itemize, the other spouse is also required to itemize.

Limit on Overall Itemized Deductions Suspended. You may be able to deduct more of your total itemized deductions if your itemized deductions were limited in the past due to the amount of your adjusted gross income. The old rule that limited the total itemized deductions for certain higher-income individuals has been suspended through 2025.

Deduction for Medical and Dental Expenses Modified. You can deduct certain unreimbursed medical expenses that exceed 7.5% of your 2021 adjusted gross income.

Deduction for State and Local Income, Sales and Property Taxes Modified. Your total deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if Married Filing Separate). Any state and local taxes you paid above this amount cannot be deducted.

Deduction for Home Mortgage and Home Equity Interest Modified. Your deduction for mortgage interest is limited to interest you paid on a loan secured by your main home or second home that you used to buy, build, or substantially improve your main home or second home.  For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts or buying a car, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not to exceed the cost of the home and meet other requirements.

New Dollar Limit on Total Qualified Residence Loan Balance. The date you took out your mortgage or home equity loan may also impact the amount of interest you can deduct. If your loan was originated or treated as originating on or before Dec. 15, 2017, you may deduct interest on up to $1,000,000 ($500,000 if you are married filing separately) in qualifying debt. If your loan originated after that date, you may only deduct interest on up to $750,000 ($375,000 if you are married filing separately) in qualifying debt. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

Limit for Charitable Contributions Modified. The limit on charitable contributions of cash has increased from 60 percent to 100 percent of your adjusted gross income.  Noncash contributions are limited to 50% of your adjusted gross income.

Charitable Contribution Deduction. For 2021, eligible individuals may deduct up to $300       ($600 MFJ) in qualified charitable contributions made to qualified charitable organizations.  An eligible individual is any individual who does not itemize. The deduction is no longer an adjustment to income but a deduction after your Adjusted Gross Income.  Therefore, the charitable deduction will not affect your state return.

Deduction for Casualty and Theft Losses Modified.  Generally, net personal casualty and theft losses have been suspended, but can be deductible only to the extent they’re attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster. The loss must still exceed $100 per casualty and the net total loss must exceed 10 percent of your AGI.  In addition, you can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss.

Miscellaneous Itemized Deductions Suspended (Schedule A). The previous deduction for job-related expenses or other miscellaneous itemized deductions that exceeded 2 percent of your adjusted gross income is suspended through 2025. This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel, as well as any deductions you may have previously been able to claim for tax preparation fees and investment expenses, including investment management fees, safe deposit box fees and investment expenses from pass-through entities.

Gambling Losses. Gambling losses remain deductible on Schedule A, Form 1040, but only to the extent of winnings, which are included in taxable income.  The IRS requires taxpayers to maintain a log of winnings and losses as documentation.

Deduction and Exclusion for Moving Expenses Suspended.  The deduction for moving expenses is suspended. During the suspension, no deduction is allowed for use of an automobile as part of a move. This suspension does not apply to members of the U.S. Armed Forces on active duty who move pursuant to a military order related to a permanent change of station. Also, employers will include moving expense reimbursements as taxable income in the employees’ wages because the new law suspends the former exclusion from income for qualified moving expense reimbursements from an employer. This suspension does not apply to members of the U.S. Armed Forces on active duty who move pursuant to a military order related to a permanent change of station as long as the expenses would qualify as a deduction if the government didn’t reimburse the expense.