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Taxes 2021: What We Know Now, What Remains Uncertain

Feb 8, 2021 | Tax News

What We Do Know

Tax rates will remain as they are currently set. They will index the income amounts per tax bracket, but each dollar amount will be indexed up. At this point, tax brackets are to remain in effect until 2026. With tax brackets remaining at what some are calling “an all-time low,” it may be time to implement Roth conversion strategies and take advantage of your current tax bracket. For those curious about Roth conversions, that’s a subject we covered more in-depth in this piece.

There was some uncertainty related to receipt of economic recovery payments for individuals who may have had income levels higher than the stated thresholds. Economic recovery payments will not have to be paid back if your income exceeded the thresholds set forth. Also, if you did not receive your payment, you will receive it on your 2020 tax return filing. This will either increase your refund or reduce the amount you owe. An important note on your stimulus payments – you must report the amount of each payment to your tax preparer. They do not have access to this information. If you are unsure about your payment amounts, please verify them on the IRS website here.

Another piece of tax news recently announced is the permanent reduction of the amount of medical expenses required to be deductible. Medical expenses will be deductible at 7.5% of Adjusted Gross Income (AGI) permanently. Previously, the deduction was only applicable for medical expenses exceeding 10% of AGI. This means that any out-of-pocket expenses paid for medical exceeding 7.5% of your AGI will be a deductible expense on your tax return. 

One notable change to the tax law is the deductibility of business-paid meals. If a business purchases food and beverage from a restaurant, the entire cost will be 100% tax-deductible for the business. This is an increase from the previous allowance of 50% deductible. It is important to note that this deduction is for meals purchased with business intent and must follow the IRS guidelines of being a true business expense. For more information on what does and does not qualify, please reach out for a consultation. 

What Remains Uncertain

In 2020, Required Minimum Distributions (RMD) had a few changes. The major one is that a person was not required to take RMD in 2020. It is undetermined at this point whether RMD will be required in 2021. However, the change from RMD being required at age 70 ½ will not be required; as of 2020, the required age is 72. 

In 2020, government student loan payments were deferred. On Jan. 20, that moratorium was extended through Sept. 30, 2021. Prior to the new extension, that moratorium was set to expire at the end of January. The deferment on Department of Education-owned loans has been extended multiple times during the pandemic, and it remains unclear if the extension will change again, pending another stimulus package.

As with everything, stay posted for updates. We will do our best to provide highlights of the tax changes as quickly as they are implemented. If you have tax questions specific to your individual situation, please feel free to send us an email or reach out using this contact form.

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