I hope that you had a great holiday. The time has arrived for the 2021 tax filing season. I’d like to share with you a few highlights of the most significant tax law changes and latest updates with key rates, thresholds and limitations that affected 2021 that you need to be aware of.
For Individual Taxpayers:
- Due date for Form 1040 by April 18, 2022.
- Standard and Itemized Deductions. The standard deduction for each filing status is $12,550 for single or married filing separately, $25,100 for married filing jointly or qualifying widow(er), and $18,800 for head of household. If the standard deduction is higher than the itemized, taxpayer should use the standard deductions.
- Tuition and Fees. They are not deductible. Instead, the income limitation for the lifetime learning credit have been increased.
- Economic Impact Payment EIP 3. Any EIP received is not taxable for federal income tax purposes, but it will reduce the recovery rebate credit. The 2021 recovery rebate credit is figured the same as for tax year 2020, except eligibility and the amount of the credit are based on tax year 2021 information. If eligible and you didn’t receive the EIP, taxpayer can claim recovery rebate credit for EIP not yet received on 2021 tax return.
- Earned Income Tax Credit. For taxpayers without a qualifying child, the applicable minimum age lowered to 19 except for specified student who must be at least age 24 at the end of the year. Also, an individual without a qualifying child no longer needs to be under 65 years of age to claim the EIC, if eligible. The amount of the credit has been increased and the phaseout income limits to claim the earned income credit has been expanded.
- Child Tax Credit. The child tax credit to qualifying children under age 18, depending on modified adjusted income. An enhanced credit up to $3,600 for qualifying child under age 6 and up to $2000 for qualifying child over age 5 and under age 18. Taxpayers have to reconcile the advanced payment amount received in 2021 with the actual credit amount on the tax return and increase the tax liability by the excess of the advance payment amount over the actual credit allowed.
- Child and Dependent Care Credit. Effective for 2021 only, the credit is refundable. The credit is 50% of eligible expenses up to a limit based on income. The credit is up to $4000 for one child and up to $8000 for two or more children. The exclusion for employer-provided dependent’s care assistance increased to $10500 for 2021.
- Forgiveness of Paycheck Protection Program (PPP Loans). No need to report this income, but certain information related to the PPP loan needs to be reported.
- Virtual Currency. The only evidence of its existence is the digital records or ledger indicating balances held and transactions that have occurred. The IRS uses the term “virtual currency” to describe the various type of convertible virtual currency that are used as a medium of exchange, such as a digital currency and cryptocurrency. Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal Income Tax purposes. If taxpayer disposed of any virtual currency that was held as a capital asset, Form 8949 must be used to figure the capital gain or loss and report it on Schedule D (Form 1040). If virtual currency received as compensation for services or disposed of any virtual currency that was held for sale in a trade or business, such transaction must be reported as income same as reporting other income.
- Identity Protection PIN. All taxpayers are eligible to apply for the IP PIN. This helps to prevent a taxpayer’s social security number from being used to file a fraudulent federal income tax return.
- Corporation Income Tax– Taxable income of a C Corporation is taxed at a flat rate of 21%.
- Personal Holding Company Tax -20% penalty on undistributed personal holding company income. No foreign tax credit allowed against personal holding company tax.
- Self- Employment Tax– 15.3% (12.4$ for SS plus 2.9% for Medicare). 0.9% Medicare Surtax on self-employment income in excess of $200,000 (single), $250,000 (MFJ), or $125,000 (MFS).
- Social Security Tax -7.65% (Social Security & Medicare) imposed on both employer and employee. Wage base is up to $142,800. $17,707.20 maximum social security tax, no ceiling on Medicare Tax.
- Federal Unemployment Tax -Employers pay 6% on first $7000 on wages paid to each employee. Maximum amount of 5.4% credit for contributions paid to state unemployment insurance fund.
- Estimated Tax – Corporations owing $500 or more in income tax for the tax year must make estimated tax payments equaling the lesser of 100% of the prior-year or the current-year tax liability. Large corporations must base the last three payments on the current-year tax liability.
- Standard Millage Rate – 56 cents per mile for business use of auto.
- Net Operating Losses – Limited to 80% of taxable income; can be carried forward indefinitely; can’t be carried back (except for farming business).
- Business Interest Deduction – Limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s adjusted gross taxable income for the tax year and (3) the taxpayer’s floor plan financing interest for the year. Any disallowed business interest deduction can be carried forward indefinitely (with certain restrictions for partnership).
- Travel, Meals, and Entertainment – Subject to limitations and restrictions, a corporations can deduct 100% of cost incurred during the ordinary and necessary course of business for travel, meals, and non-entertainment expenses paid or incurred in its trade or business.
- Like-Kind Exchange – Limited to real property not primarily held for sale.
- Corporate Alternative Minimum Tax – AMT no longer applies to corporations.
- Nonresident and Foreign Corporations are taxed on U.S-source investment income at 30% (or lower under treaty). Accumulated earnings tax of 20% of accumulated taxable income.
- Filing Deadlines:
- Form 1120, U.S. C Caproate Income Tax Returns are due April 15th for calendar-year corporations. Form 7004, Application for Automatic Extension of Time to File is available to file before due date to request an extension to October 15th.
- Form 1120-S U.S. Income Tax Return for S Corporation is due by the 15th day of the third month following the close of the corporation tax year (six months extension available using Form 7004); Form 1120-S, Schedule K-1 Shareholder’s share of Income, Deductions, Credits is due to shareholders on or before the due date the S Corporation files Form 1120-S.
- Form 1065, U.S. Return of Partnership Income is due by the 15th day of the third month following the close of the partnership tax year (six months extension available using Form 7004). Form 1065, Schedule K-1 Partner’s Share of Income Deduction, Credits due to partners by the date the partnership files its returns.
Identity Theft continues to be priority. Your tax professional should have implemented security measures in the use of the tax software and safety methods in exchanging documents. I am aware and fully prepared for this tax filing season. My investment in a Client Portal Service is ready and available to all clients the ability to securely login to exchange documents.