In addition to the planning changes in tax benefit phaseouts and other cost of living (COLA) adjustments, here are changes to the tax code for 2021.
- Tuition and Fees Deduction eliminated. This oft-expired tax break is now permanently closed.
- Lifetime Learning Credit phaseouts increase dramatically. To help reduce the impact of the elimination of the Tuition and Fees Deduction, the income phaseout of this education expense tax break is dramatically increasing to $80,000 unmarried ($160,000 married filing joint). This is an increase of $20,000 to $40,000!
- Medical and other health care related expense threshold to remain at 7.5% of income. To begin deducting health expenses as an itemized deduction, the expense threshold no longer moves to the planned 10% level.
- Additional economic recovery payments. The Federal Government is issuing additional pandemic related payments that are non-taxable. There is no proof of hardship required to receive the payments. They are based on income and number of qualifying dependents.
- Mortgage insurance premium deductibility. You may still deduct mortgage insurance premiums as an itemized deduction. This was set to expire last year.
- Exclude discharge of mortgage indebtedness. With the extension of this law, qualified debt forgiveness on qualified mortgages is still not considered income.
- Above the line charitable deductions. If you do not itemize, you can deduct up to $300 in qualified charitable deductions ($600 for married couples).
For Small Businesses
- PPP loans for small businesses. PPP loan forgiveness is no longer a taxable event for your small business. The same goes for any second round loans your business receives this year if they qualify.
- 100% meal deductibility. Business meals are typically only deductible at 50%. To help aid restaurants during the pandemic, a new law allows for 100% meal expense deductions for both 2021 and 2022.
- Numerous general business credits extended. New laws extend expiring tax credits for many small businesses. There are too many to mention here, but common extended credits include; work opportunity credit, credit for paid family and medical leave, and employer paying employee student loan payments.
Given the ongoing pandemic, expect other tax changes throughout the year.