Important Changes for 2021 Tax Returns. Are You Ready?
Electric Vehicle Credit Phaseout
Finalization of State and Local Tax Deduction Limitation
Federal Penalty for Not Being Insured Eliminated & New California Tax Penalty Added
Seniors’ Special Tax Form
Family and Medical Leave Credit
As the end of the year approaches, now is a good time to review the various changes that impact 2021 tax returns. Some of the changes are likely to apply to your tax situation. In addition, be aware that various tax-related bills currently in Congress may or may not pass this year. If any of them do pass, we will quickly get the details to you.
Medical Threshold – Medical expenses are deductible as itemized deductions only if the total medical expenses for the tax year exceed a specified percentage of a taxpayer’s income. After dropping to 7.5% for 2017 and 2018, this threshold reverts to 10%. As a result, any medical expenses from 2021 are deductible only to the extent that they exceed 10% of a taxpayer’s adjusted gross income for the year.
Electric Vehicle Credit Phaseout – As an incentive to get taxpayers to move away from conventional-fuel (gasoline or diesel) vehicles, Congress has provided tax credits of up to $7,500 for the purchase of plug-in electric vehicles. However, Congress’s rules limit the full credit to the first 200,000 vehicles sold by a given manufacturer. Once a company sells 200,000 qualifying vehicles, the credit begins to phase out for that company. Tesla, Chevrolet, and Cadillac have all reached the phaseout point. The table below shows the credits available depending upon the quarter when the vehicle is purchased. There are many automakers that still have not reached the 200,000 vehicles sold point. Large tax credits of up to $7,500 are still available on a wide variety of both electric vehicles and plug-in hybrid electric vehicles. Please call ProTax Service at (310) 869-0038 to find out more about specific vehicles that still qualify for the electric vehicle credit in 2021.
If a qualifying vehicle is used partiality for business, the credit is proportionally allocated between personal and business tax credits. The personal portion can only offset the individual’s current-year tax liability; any excess is lost. The business portion can be carried back for one year and then forward up to 20 years until it is used up; any credit remaining after the 20th year is lost. As a tip, please note that the credit limit is per vehicle, not per taxpayer, so individuals who make multiple purchases can receive multiple credits.
Alimony – One delayed effect of the 2017 tax reform is that, the treatment of alimony changes for some individuals starting in 2019.
For divorces or separations entered into before 2019, alimony payments continue to be deductible for the payer and taxable for the recipient; such payments also still qualify as earned income for purposes of the recipient’s qualification for an IRA deduction. For divorces or separations executed after December 31, 2018, alimony payments are no longer deductible for the payer. In addition, for the recipient, they are no longer taxable income and do not count as earned income for the purposes of IRA deduction.
Divorces or separations entered into before 2019 continue to follow the pre-2019 rules unless they have been modified after December 31, 2018; in that case, the alimony payments are subject to the post-2018 rules if the modification expressly provides for this.
Finalization of State and Local Tax Deduction Limitation – The 2017 tax reform limited the itemized deduction for state and local taxes (SALT) to $10,000 (or $5,000 for married individuals filing separately). This has adversely impacted taxpayers in high-tax states such as California, Connecticut, New Jersey, and New York. Elected officials in several states have attempted to work around this restriction by establishing (or proposing to establish) state charities. The idea is that taxpayers would make deductible contributions that, in return, would give them tax credits against their SALT equal to most of the value of the charitable contributions. Unfortunately, these officials have overlooked the 1986 U.S. Supreme Court ruling that, if a taxpayer receives something in return for a contribution (i.e., a quid pro quo), the contribution is not deductible.
The final regulations generally reduce the charitable-contribution deduction by the amount of any SALT credit received. However, as an exception, if the credit does not exceed 15% of the contribution, the entire contribution is deductible.
Penalty for Not Being Insured – The Tax Cuts and Jobs Act (tax-reform) that was enacted at the end of 2017 eliminated the Obamacare shared-responsibility payment, effective starting in 2019. Congress didn’t actually repeal this penalty; instead, it effectively repealed it by tweaking by setting zero values for both the percentage of household income used in the calculation and the flat dollar amount of the penalty. As a result, the amount of the penalty is always zero. While the Federal penalty for being uninsured has been eliminated for 2019, beginning in 2020 and continuing last year for 2021, the State of California now charges a new tax penalty to residents without qualified health insurance coverage.
Seniors Get a Special Tax Form – Lawmakers have long sought to provide taxpayers who are age 65 and older with a simplified tax form in place of the Form 1040. In the 2018 budget bill, Congress finally included a requirement that the IRS create such a form. As a result, the IRS will introduce Form 1040-SR, which will look a lot like the old form looked before the 2018 tax reform instituted its division of the Form 1040 into multiple postcard-size schedules. It is unclear how much simpler the Form 1040-SR will be, but it will be available for 2019 returns. Form 1040-SR will be optional.
Family and Medical Leave Credit – The employer credit for family and medical leave, which was created in the 2017 tax reform, ends after 2019. This two-year program provides employers with a tax credit equal to 12.5% of the wages they paid to qualifying employees during any period when those employees were on family and medical leave, provided that the rate of the leave payments are at least 50% of the employees’ normal wages. The credit can be claimed for a maximum of 12 weeks of leave for any employee during the tax year. For each percentage point for which the leave payments exceed 50% of normal wages, this credit increases by 0.25 percentage points (up to a maximum of 25%). Participation in this credit program is optional.
Inflation Adjustments – Just about every tax-related value is adjusted for inflation. Some values are adjusted for any level of change, but others are adjusted only if the change reaches at least a specific dollar amount (so these values may not change every year). The table below includes inflation adjustments for some of the most frequently encountered values.
If you have questions related to any of the topics discussed in this article, please call the tax professionals at ProTax Service in Playa Vista at (310) 869-0038. We specialize in filing taxes for self-employed individuals, families, and small business tax preparation in Culver City, Playa del Rey, Westchester, Santa Monica and Marina del Rey.