Individual Tax

Every year brings some degree of change regarding filing income taxes. While 2020 taxes are a done deal, it’s never too early to begin thinking about the next tax year. To help you be prepared for next year’s filing, here are 6 Ways Income Taxes Will Be Different for 2021.

Standard Deduction Increase

Standard deductions reduce the amount of your income that is subject to federal tax. Most taxpayers do not have enough deductions to itemize, so they take the standard deduction. Annual adjustments for inflation cause the standard deduction to increase slightly each tax year. For 2021, here are the standard deductions and the amount of the increase from the prior year.

• Married filing jointly $25,100, up $300
• Single and married filing separately $12,550, up $150
• Head of household $18,800, up $150

While itemizing is more work, if your itemized deductions exceed the standard deduction allowance for your tax filing category, itemizing makes sense.

Higher Tax Brackets

You already know the more money you earn, the more you pay in taxes. How much you earn, your income, along with your filing status, determines your tax bracket. There are seven tax brackets with the top tax rate being 37 percent for taxable income over $518,400. Brackets are adjusted annually to account for inflation. For 2021, tax bracket thresholds were increased by about 1 percent over 2020 levels.

Capital gains

When you sell an investment like real estate, stocks, or bonds, for more than you paid the net profit you make is taxed as either short- or long-term capital gains. If you held your investment for less than one year, you pay short-term capital gains. For investments held more than one year and one day, the capital gains tax on the profit you made is long-term. Short-term capital gains are taxed like regular income and up to $3,000 of short-term losses can be deducted. However, long-term capital gains are taxed different rates (0 – 20 percent) depending on taxable income and marital status.

For example, if you’re single and your income is below $40,400 in 2021, you fall into the 0 percent capital gains tax bracket. However, if you’re single and earn between $40,401 and $445,850, you move into the 15 percent bracket. Above that, it’s the 20 percent bracket for you.

The 0 percent bracket is approximately double for married couples ($80,800), but above that, brackets are close to the single filer brackets (15 percent up to $501,600 and 20 percent above that).

Individual Tax Credits

Tax credits lower your overall tax bill. There are quite a few credits to consider, but the most popular ones are the earned income tax credit, the saver’s tax credit, and the lifetime learning tax credit.

Earned income credit is for low- and middle-income taxpayers and is based on income, filing status, and number of children, although taxpayers without children can qualify. For 2021, the earned income credit ranges are up very slightly over 2020 and range from $543 to $6,728. Some criteria for the credit are having at least $1 of earned income, investment income must be $3,650 or less. Other stipulations apply, so check with your tax preparer to see if you qualify.

Saver’s credit is also designed for low- and middle-income taxpayers and is to encourage retirement contributions. Taxpayer adjusted gross income (AGI) must be less than $33,000 in 2021 (up slightly from $32,500 in 2020) to qualify for the credit for single or married filing separately. Married filing jointly AGI must be less than $66,000 in 2021 (up from $65,000 in 2020).

Lifetime learning credit is for taxpayers who incur education expenses during the year. There was little change in this credit for 2021. Married filing jointly income limits increased $1,000 (from $118,000 to $119,000 for full credit and from $138,000 to $139,000 for partial credit). Other filing statuses will see no change for 2021.

Alternative Minimum Tax

The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly. This is a change from 2020 when the exemption amount was $72,900 and $113,400 for married couples filing jointly.

Fringe Benefits, Medical Savings Accounts, and Estates

Most employee fringe benefits allowances for 2021 will continue at their 2020 levels; however, changes occur in health savings account (HSA) contributions, which increase by $50 for single and $100 for families from 2020.

The maximum out-of-pocket amounts for high-deductible health plans (HDHP) increases by $100 for single and $200 for families.

The federal estate tax targets the amount of wealth you can pass along when you die. It is no concern unless your estate is worth more than $11.7 million when you die. That figure is up from $11.58 million in 2020.

Retirement Plans

Contributions for 401(k) plans will not change from 2020 top off amount of $19,500 with a $6,500 catch-up contribution allowed for individuals 50 or older. Maximum contributions from all sources (employer and employee) rise by $1,000.

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Of course, these are an overview of changes for the 2021 tax year. To be sure you’re up to speed on all the tax changes that impact you, be sure to speak to your trusted accountant.

Get back to the job of running your business and leave the accounting to us! Call us at 407-281-7375 now and request a free consultation to find out how we can work together for your success.

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance premiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

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If you are seeking a steady income stream from your portfolio while trying to minimize the tax impact of that income, you may want to look into municipal bonds. Municipal bonds traditionally have had a relatively low default rate and may offer diversification benefits.¹

What They Are

Municipal bonds are debt securities that are issued by states, cities, counties, and other government entities. Issuers use the funds to fund day-to-day obligations and to pay for capital projects.

Municipal bonds come in two basic types: general obligation bonds and revenue bonds. General obligation bonds are backed by the issuer’s taxing power. Revenue bond payments are funded by the revenues from a specific project or source.

Why Buy Municipal Bonds?

The interest investors earn on most municipal bonds is exempt from federal income taxes.² In addition, many states do not tax their residents on interest earned from municipal bonds issued in the state. The tax-exempt feature of municipals may mean that, after taking into account tax considerations, you can earn a better return on a municipal bond than you would from a higher yielding taxable bond.

The value of this tax benefit depends on your tax situation and is highest for investors in higher tax brackets or those who reside in high-tax jurisdictions.

Additional Benefits

You can potentially enjoy several other advantages apart from tax-exempt income when you invest in municipal bonds:

• A predictable income stream for the life of the bond;
• Marketability should you need to sell the bonds before maturity; and
• Choices as to issuer, quality, and geographic location.

Municipal Bonds Are Not Risk-Free

Like all investments, municipal bonds have their own set of risks. The financial health of an issuer and its ability to make timely payments of interest and principal is something you should investigate before buying. Various credit rating agencies, such as Moody’s Investors Services, assess the credit rating of the governmental entities that issue municipal bonds. Generally, issuers with lower credit ratings tend to offer higher yields on their municipals to compensate for the added risk to your principal.

Municipals, like other bonds, are subject to interest rate risk. Rising interest rates cause bond prices to fall. In a period of rising interest rates, selling a municipal bond before it matures may mean having to accept a lower price than you paid for it. In addition, municipal bonds can be impacted by other market forces.

Despite credit, interest, and market force risks, municipal bonds may have a role to play in a carefully structured, diversified fixed-income portfolio. Your financial advisor can help determine whether your portfolio would benefit from holding municipals.

¹Diversification does not ensure a profit or protect against loss in a declining market.

²The interest on certain “private activity” bonds must be included in income for federal alternative minimum tax purposes.