2021 INCOME TAX RATES FOR INDIVIDUALS AND ESTATES AND TRUSTS

The passage of the Tax Cuts and Jobs Act (TCJA) of 2017 brought about a temporary change to the tax rate structure.  The new provision applies to taxable years beginning after December 31, 2017. Changes from this provision will sunset and revert to the prior structure for taxable years beginning after December 31, 2025.

The TCJA reduced tax rates for many taxpayers, leaving the top tax rate at 37-percent. For tax year 2021, the highest 37-percent rate applies if income exceeds $628,300 (for joint returns and surviving spouses). The threshold is $523,600 for single taxpayers and heads of households, and $314,150 for married taxpayers filing separately.

2021 FEDERAL INCOME TAX RATES FOR INDIVIDUALS AND ESTATES AND TRUSTS

 

Single / Unmarried Individuals (other than Surviving Spouses and Heads of Households)
If taxable income is:	Then income tax equals:
Not over $9,950	10% of the taxable income
Over $9,950 but not over $40,525	$995 plus 12% of the excess over $9,950
Over $40,525 but not over $86,375	$4,664 plus 22% of the excess over $40,525
Over $86,375 but not over $164,925	$14,751 plus 24% of the excess over $86,375
Over $164,925 but not over $209,425	$33,603 plus 32% of the excess over $164,925
Over $209,425 but not over $523,600	$47,843 plus 35% of the excess over $209,425
Over $523,600	$157,804.25 plus 37% of the excess over $523,600

 

 

Heads of Households
If taxable income is:	Then income tax equals:
Not over $14,200	10% of the taxable income
Over $14,200 but not over $54,200	$1,420 plus 12% of the excess over $14,200
Over $54,200 but not over $86,350	$6,220 plus 22% of the excess over $54,200
Over $86,350 but not over $164,900	$13,293 plus 24% of the excess over $86,350
Over $164,900 but not over $209,400	$32,145 plus 32% of the excess over $164,900
Over $209,400 but not over $523,600	$46,385 plus 35% of the excess over $209,400
Over $523,600	$156,355 plus 37% of the excess over $523,600

 

 

Married Individuals Filing Joint Returns and Surviving Spouses
If taxable income is:	Then income tax equals:
Not over $19,900	10% of the taxable income
Over $19,900 but not over $81,050	$1,990 plus 12% of the excess over $19,900
Over $81,050 but not over $172,750	$9,328 plus 22% of the excess over $81,050
Over $172,750 but not over $329,850	$29,502 plus 24% of the excess over $172,750
Over $329,850 but not over $418,850	$67,206 plus 32% of the excess over $329,850
Over $418,850 but not over $628,300	$95,686 plus 35% of the excess over $418,850
Over $628,300	$168,993.50 plus 37% of the excess over $628,300

 

Married Individuals Filing Separate Returns
If taxable income is:	Then income tax equals:
Not over $9,950	10% of the taxable income
Over $9,950 but not over $40,525	$995 plus 12% of the excess over $9,950
Over $40,525 but not over $86,375	$4,664 plus 22% of the excess over $40,525
Over $86,375 but not over $164,925	$14,751 plus 24% of the excess over $86,375
Over $164,925 but not over $209,425	$33,603 plus 32% of the excess over $164,925
Over $209,425 but not over $314,150	$47,843 plus 35% of the excess over $209,425
Over $314,150	$84,496.75 plus 37% of the excess over $314,150

 

 

Estates and Trusts
If taxable income is:	Then income tax equals:
Not over $2,650	10% of the taxable income
Over $2,650 but not over $9,550	$265 plus 24% of the excess over $2,650
Over $9,550 but not over $13,050	$1,921 plus 35% of the excess over $9,550
Over $13,050	$3,146 plus 37% of the excess over $13,050

OTHER REV. PROC. 2020-45 ANNUAL INFLATION ADJUSTMENTS FOR 2021

The Internal Revenue Service has updated the tax year 2021 annual inflation adjustments. The tax year 2021 adjustments are generally used on 2021 tax returns filed in 2022.

The tax items affected by annual inflation adjustments for the tax year 2021 of greatest interest to most taxpayers include the following:

• Standard Deduction:

For taxable years beginning in 2021, the standard deduction amounts are as follows: Married Individuals Filing Joint Returns and Surviving Spouses $25,100

 

 

Heads of Households $18,800

Unmarried Individuals (other than Surviving Spouses and Heads of Households) $12,550 Married Individuals Filing Separate $12,550

Aged or blind – For 2021, the additional standard deduction for the aged or the blind is $1,350. Increase this amount to $1,700 if the individual is also unmarried and not a surviving spouse.

Dependent – For 2021, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of (1) $1,100, or (2) the sum of $350 and the individual’s earned income.

• Gross Income Limitation for a Qualifying Relative – For 2021, the exemption amount is $4,300.
• Adoption Credit – For 2021:

1. A $14,440 credit is available for adopting a child with special
2. The credit is available for other adoptions but is limited to the lesser of qualified adoption expenses or $14,440.
3. A phase-out applies to taxpayers with modified adjusted gross income above $216,660. The credit is completely phased out at $256,660 or

• Exemption Amounts for Alternative Minimum Tax: For 2021, the exemption amounts are:

$114,600 – Joint Returns or Surviving Spouses

$73,600 – Unmarried Individuals (other than Surviving Spouses)

$57,300 – Married Individuals Filing Separate Returns

$25,700 – Estates and Trusts

For 2021, the excess taxable income above which the 28-percent tax rate applies is:

$99,950 – Married Individuals Filing Separate Returns

$199,900 – Joint Returns, Surviving Spouses, Unmarried Individuals, and Estates and Trusts

For 2021, the amounts used to determine the phaseout of the exemption amounts are:

$1,047,200 – Joint Returns or Surviving Spouses

$523,600 – Unmarried Individuals (other than Surviving Spouses)

$523,600 – Married Individuals Filing Separate Returns

$85,650 – Estates and Trusts

Child subject to the “Kiddie Tax” – For 2021, the AMT exemption cannot exceed the child’s earned income for the

taxable year, plus $7,950.

• Certain Expenses of Elementary and Secondary School Teachers – For 2021, an eligible educator is allowed a deduction of up to $250 for expenses of books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials used by the eligible educator in the
• Medical Savings Accounts – For 2021, to qualify as a “high deductible health plan” the annual deductible must not be less than $2,400 ($4,800 for family coverage) and not more than $3,600 ($7,150 family coverage). The limit on annual out-of-pocket expenses (other than for premiums) for covered benefits cannot exceed $4,800 ($8,750 for family coverage).
• Interest on Education Loans – For 2021, certain taxpayers with qualified education loans are eligible for a $2,500 maximum deduction for interest paid. This amount is subject to phase-out for taxpayers with modified adjusted gross income in excess of $70,000 ($140,000 for joint returns). No deduction is available when modified adjusted gross income is $85,000 or more ($170,000 or more for joint returns).
• Income from US Savings Bonds for Taxpayers Who Pay Qualified Higher Education Expenses – For 2021, certain taxpayers are able to exclude income from United States savings bonds if they pay qualified higher education expenses. The exclusion begins to phase out for modified adjusted gross income above $124,800 for joint returns

 

 

and $83,200 for all other returns. The exclusion is no longer available if the taxpayer has modified adjusted gross income of $98,200 or more ($154,800 or more for joint returns).

• Foreign Earned Income Exclusion – For 2021, the foreign earned income exclusion amount is $108,700.
• Unified Credit Against Estate Tax – For an estate of any decedent dying in calendar year 2021, the basic exclusion

amount is $11,700,000 for determining the amount of the credit against the estate tax.

• Annual Exclusion for Gifts – For the calendar year 2021:

The first $15,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.

The annual gift exclusion increases to $159,000 (other than gifts of future interests in property) of gifts to a noncitizen spouse.

Revenue Procedure 2020-45 provides greater detail on these and other tax items affected by annual inflation adjustments for the tax year 2021.

OTHER 2021 ANNUAL INFLATION ADJUSTMENTS AND CHANGES

• Health Savings Accounts (HSAs) – Revenue Procedure 2020-32 provides the 2021 inflation-adjusted amounts for

Health Savings Accounts (HSAs) as determined under the Internal Revenue Code.

Annual contribution limitation – For the calendar year 2021, the annual limitation on deductions for an individual

with:

Self-only coverage under a high deductible health plan is $3,600. Family coverage under a high deductible health plan is $7,200.

High deductible health plan – For the calendar year 2021 a “high deductible health plan” is defined as a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $7,000 for self-only coverage or $14,000 for family coverage.

• Personal exemption remains at $0 for

2021 COLA INCREASES FOR DOLLAR LIMITATIONS ON BENEFITS AND CONTRIBUTIONS

CHANGES FOR 2021

The contribution limit remains at $19,500 for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. The catch-up contribution also remains at $6,500 for employees aged 50 and over who participate in these plans.

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Deductible contributions to a traditional IRA may be reduced or eliminated if during the year either the taxpayer or their spouse was covered by a retirement plan at work. A phase-out applies based on filing status and income. Here are the phase-out ranges for 2021:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000.
• For joint filers (where the spouse making the IRA contribution is covered by a workplace retirement plan) the phase- out range is $105,000 to $125,000. If a contributing spouse is not covered by a workplace retirement plan (but their spouse is), the deduction is phased out if the couple’s income is between $198,000 and $208,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

TIP: If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.

 

 

For 2021, the income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, $198,000 to $208,000 for joint filers, and $0 to $10,000 for married filing separately.

DOLLAR LIMITATIONS FOR 2020 AND 2021

 

	2020	2021
IRAs
IRA Contribution Limit	$6,000	$6,000
IRA Catch-Up Contributions	1,000	1,000
SEP
SEP Minimum Compensation	600	650
SEP Maximum Contribution	57,000	58,000
SEP Maximum Compensation	285,000	290,000
SIMPLE Plans
SIMPLE Maximum Contributions	13,500	13,500
Catch-up Contributions	3,000	3,000
401(k), 403(b), Profit-Sharing Plans, etc.
Annual Compensation	285,000	290,000
Elective Deferrals	19,500	19,500
Catch-up Contributions	6,500	6,500
Defined Contribution Limits	57,000	58,000
ESOP Maximum Balance Subject to 5-year Distribution Period	1,150,000	1,165,000
ESOP Limit for Determining Length of 5-year Distribution Plan	230,000	230,000
Other
HCE Threshold	130,000	130,000
Defined Benefit Limits	230,000	230,000
Key Employee	185,000	185,000
457 Elective Deferrals	19,500	19,500
Control Employee (board member or officer)	115,000	115,000
Control Employee (compensation-based)	230,000	235,000
Taxable Wage Base	137,700	142,800

 

 

2021 SAVER’S CREDIT

New standard mileage rates (Notice 2021-02) 13

 

A taxpayer may claim the nonrefundable saver’s credit (formerly retirement savings contributions credit) for qualified contributions or deferrals made to certain retirement plans. The credit amount begins at 50% of the taxpayer’s contributions to the plan, contributions up to $2,000 ($4,000 MFJ), and is reduced depending on the taxpayer’s adjusted gross income (AGI) and filing status. The maximum credit is $1,000 ($2,000 MFJ).

 

Credit Rate	Married Filing Jointly	Head of Household	All Other Filers*
50% of your contribution	AGI not more than $39,500	AGI not more than $29,625	AGI not more than $19,750
20% of your contribution	$39,501 – $43,000	$29,626 – $32,250	$19,751 – $21,500
10% of your contribution	$43,001 – $66,000	$32,251 – $49,500	$21,501 – $33,000
0% of your contribution	more than $66,000	more than $49,500	more than $33,000
*Single, married filing separately, or qualifying widow(er).

 

NEW STANDARD MILEAGE RATES (NOTICE 2021-02)

DEDUCTION FOR VEHICLE USE

A taxpayer can deduct car expenses for vehicles used exclusively in a trade or business. If using a car for both business and personal purposes, the taxpayer must divide expenses based on actual mileage. Generally, commuting expenses between the taxpayer’s home and a business location, within the area of the taxpayer’s tax home, are not deductible.

A taxpayer can deduct the business part of the actual vehicle expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, may be able to use the standard mileage rate for business use to figure the deduction.

To qualify to use actual expenses, the taxpayer must use the actual expense method for the first year placing the vehicle in service for business use. A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method other than straight-line, or after claiming a Section 179 deduction for that vehicle. The taxpayer can not claim the business standard mileage rate for more than four vehicles used simultaneously. A   taxpayer may use the business standard mileage rate for vehicles used for hire, such as taxicabs.

TIP: A taxpayer can choose to use the standard mileage rate method or the actual expenses method. For business use,  a taxpayer using the standard mileage rate method, in later years can choose to use the standard mileage rate or  switch to actual expenses. However, once a taxpayer uses actual expenses for the vehicle, the taxpayer can not switch  to the standard mileage rate. The taxpayer must continue using actual expenses as long as they use that vehicle for business.

Beginning on January 1, 2021, the standard mileage rates are as follows:

• 56 cents per mile driven for business use
• 16 cents per mile driven for medical or moving purposes (moving purpose applies only to a member of the Armed Forces on active duty who moves pursuant to a military order and incident to a permanent change of station)
• 14 cents per mile driven in service of charitable organizations

The taxpayer can also deduct the business part of the interest on the car loan, state and local personal property tax on the car, parking fees, and tolls, under either method used for business.

TIP: Taxpayers can calculate the actual vehicle expenses or use the standard mileage rate. Note: The calculation of actual vehicle expenses for business use differs from charitable, medical, or moving use.

 

 

UPDATE ON CARES ACT PROVISIONS

Several provisions were enacted during the pandemic in 2020 to help individuals and families affected by COVID-19. It is important to understand the implications of these rules in 2021. You should specifically be aware of:

• The resumption of required minimum distribution (RMD) rules starting in tax year 2021. The CARES Act paused RMDs only for tax year 2020. The requirement to take minimum distributions for IRAs and retirement plans resumes in 2021.
• The required 3-yr repayment of COVID-19 related distributions from retirement
• The ability for certain taxpayers to claim a Recovery Rebate Credit (RRC) for stimulus check they qualify for but did not receive.
• The adjustment to income for charitable contributions of cash (up to $300) made by taxpayers who claim the

standard deduction. Taxpayers who file jointly may claim $300 for each spouse, increasing the adjustment to $600.

2021 RMD PROVISIONS

Taxpayers generally must begin taking distributions from eligible retirement plans upon reaching age 72. The IRS waived the mandatory distribution requirement for taxpayers subject to the RMD rules in 2020. The waiver applied to defined contribution plans and IRAs, as well as 403(b) and 457 plans. Required distributions from inherited IRAs were also not required in 2020. Required minimum distributions must resume in 2021.

3- YEAR REPAYMENT OF COVID-19 RELATED DISTRIBUTIONS

The CARES Act waived the 10% early withdrawal penalty for up to $100,000 of coronavirus-related distributions from

eligible retirement plans on or after January 1, 2020, and before December 31, 2020.

Unless the taxpayer elects otherwise, any amount required to be included in gross income for the year of distribution is spread over the 3-taxable-year period beginning with such taxable year.

 

In other words, the taxpayer can recontribute the money taken as a coronavirus-related distribution back into the plan for a period of 3 years beginning the day after the contribution without penalty or tax consequences. Repaid amounts are not subject to any contribution or rollover limits.

TIP: Taxpayers can claim a refund for any income taxes paid on amounts previously included in income that were subsequently repaid timely.

Only coronavirus-related distributions that are eligible for tax-free rollover treatment under Section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) may be recontributed.

For example, any coronavirus-related distribution from a workplace retirement plan or IRA paid to a qualified individual as a beneficiary of an employee or IRA owner—other than the surviving spouse of the employee or IRA owner—is not eligible to be repaid.

Hardship distributions are not typically an eligible rollover distribution. However, if the hardship distribution meets requirements to be a coronavirus-related distribution, it can be recontributed to an eligible retirement plan.

 

Update on CARES Act provisions 15

 

Taxpayers who take coronavirus-related distributions from qualified plans (including IRAs) use Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, to report all distributions for the year, identify coronavirus-related and other qualified disaster distributions, to report repayments made for the year, to calculate the taxable amount of the distributions, and to identify qualified distributions for the purchase or construction of a main home.

Form 8915-E is filed with the tax return, or sent in separately for individuals not otherwise required to file a return. The

timing of the distribution determines whether a return needs to be amended to include the form.

RECOVERY REBATE CREDIT

A third round of economic impact payments of $1,400 per eligible taxpayer or dependent was authorized for  distribution beginning in March 2021. Unlike the first two payments, the third payment is not restricted to children under 17. Eligible individuals will get a payment based on all qualifying dependents claimed on their return, including older relatives like college students, adults with disabilities, parents, and grandparents.

Eligibility requirements for the third stimulus payment include:

• Must be US citizen or US resident alien (and their spouse if filing a joint return), and
• Must not be a dependent of another taxpayer
• Adjusted gross income (AGI) not more than:
  1. $150,000 if married and filing a joint return or if filing as a qualifying widow or widower
  2. $112,500 if filing as head of household or
  3. $75,000 for eligible individuals using any other filing status
• Payments are reduced when AGI is above the limits and completely phased out for taxpayers with AGI above:

1. $160,000 if married and filing a joint return or if filing as a qualifying widow or widower
2. $120,000 if filing as head of household
3. $80,000 for eligible individuals using any other filing status

These advance payments are not taxable income as they are a credit against tax. All taxpayers must have a valid Social Security Number (or ATIN for an adopted child) to qualify.

CERTAIN CHARITABLE CONTRIBUTIONS DEDUCTIBLE BY NON-ITEMIZERS

Another temporary provision involves a special $300 adjustment for cash contributions to qualified tax-exempt organizations. While this provision benefits the individual as well, it is designed to help charities that are struggling as a result of coronavirus.

Typically only taxpayers who itemize deductions benefit from charitable contributions on their tax return. This special provision is available for taxpayers taking the standard deduction and was introduced for the 2020 tax return (filed in 2021). It allows for an above-the-line deduction (adjustment) of $300 for cash contributions to qualifying organizations. As part of the passage of the Consolidated Appropriations Act, 2021, this provision was extended for tax year 2021, with minor adjustments. For tax year 2021, married taxpayers filing a joint return are eligible to deduct up to $600 of cash contributions.

Cash contributions include contributions made with a check, credit or debit card (excludes donations of securities, household items, or other property). A taxpayer should verify the organization qualifies using the Tax Exempt

 

 

Organization Search tool on the IRS website. Additionally, taxpayers must observe the same recordkeeping

requirements for charitable donations detailed in Publication 526.

Along with the introduction of this adjustment for non-itemizers, the IRS increased the penalty assessed under Section 6662 for overstatements of qualified charitable contributions. Section 6662 establishes the accuracy-related penalty   for understatements on a tax return. The penalty is generally 20% of the understated amount. For overstatements of the charitable contribution adjustments resulting in underpayments, the penalty increased to 50%.

 

CURRENT STATUS OF TAX EXTENDERS

Some tax benefits are not permanently written into the code. These benefits expire unless Congress extends the rules into future years by updating the law. We have come to know these “expiring” benefits as extenders.

Unfortunately, Congress doesn’t always act in time and benefits expire. This creates a fair amount of uncertainty with these benefits and makes it difficult for taxpayers to plan. Sometimes the changes apply retroactively to prior years requiring taxpayers to file amended returns in order to claim the benefits.

On December 21, 2020, Congress passed the Consolidated Appropriations Act, 2021 which extends or changes certain provisions that expired at the end of 2020.

• Exclusion of cancellation of debt income from the discharge of qualified principal residence indebtedness – A taxpayer is able to exclude from gross income a discharge of qualified principal residence indebtedness. This exclusion now applies to discharges made after 2006 and before

Previously this exclusion was extended in one-year increments; however, this exclusion is now extended to include discharges made before January 1, 2026.

The Act also reduced the exclusion amount to $750,000 ($375,000 married filing separate) for discharges of indebtedness after December 31, 2020. For discharges prior to 2021, the exclusion amount was $2 million ($1 million if married filing separately). Thus, the maximum amount a taxpayer may treat as qualified principal residence indebtedness is $750,000 ($375,000 if married filing separately) for debt discharged 2021 through 2025.

• Itemized deduction for qualified mortgage insurance premiums – The amount paid during the year for qualified mortgage insurance is treated as home mortgage interest (and claimed as an itemized deduction) when the insurance is purchased in connection with the acquisition indebtedness of the taxpayer’s qualified residence. This deduction decreases by 10% for each $1,000 ($500 MFS) of AGI above $100,000 ($50,000 MFS). This deduction is extended through December 31,
• Nonbusiness energy property credit – A taxpayer may be able to claim a credit equal to the sum of 10% of the amount paid or incurred for qualified energy efficiency improvements and any residential energy property costs. A total combined credit limit of $500 for all tax years after 2005. If the total of any nonbusiness energy property credits you have taken in previous years (after 2005) is more than $500, you generally can’t take the credit. This credit is extended through December 31,
• Medical expense deduction AGI limit – A taxpayer itemizing deductions on Schedule A is able to deduct the amount of medical and dental expenses paid during the tax year that exceed an AGI limit. The temporary 7.5% AGI limit was set to expire and the limit was to increase to the Section 213 10% AGI limit. The Consolidated Appropriations Act,    2021 amended Section 213 and changed the medical expense deduction floor percentage to 7.5% for taxable years beginning after December 31, 2020. Since the code section was amended, the AGI limit is no longer subject to an extension.
• Tuition and fees deduction – The Consolidated Appropriations Act, 2021 provides a provision for the transition from the deduction for qualified tuition and related expenses to an increased income limitation on the lifetime learning The deduction for qualified tuition and fees is repealed effective for taxable years beginning after December 31, 2020. Therefore, beginning in 2021, the tuition and fees deduction is no longer available.

 

American Rescue Plan Act of 2021 (ARPA) 17

 

• The phaseout limits for the lifetime learning credit increased effective for taxable years beginning after December 31, 2020. Beginning in 2021, the phaseout limits for the Lifetime Learning credit will be the same as the phaseout limits for the American Opportunity credit. Also, like the American Opportunity credit, beginning in 2021 the Lifetime Learning credit phaseout limits will no longer adjust for inflation. Beginning in 2021, the phaseout limits for the lifetime learning credit are:
  1. Full credit if modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for married filing joint).
  2. Reduced credit if MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing joint).
  3. No credit if MAGI is $90,000 or more ($180,000 or more for married filing joint).

 

AMERICAN RESCUE PLAN ACT OF 2021 (ARPA)

In March 2021, Congress passed another bill that brought about several changes to important tax benefits. The American Rescue Plan Act of 2021 (ARPA) introduces significant changes in tax year 2021. Of most importance are the changes to the:

• Child Tax Credit
• Earned Income Credit
• Child and Dependent Care Credit
• Employer-Provided Dependent Care Assistance

A short summary of the changes to each credit is listed below:

CHILD TAX CREDIT (CTC)

Child Tax Credit improvements for 2021 include:

1. The credit is fully refundable for qualifying taxpayers
2. Qualifying child age is increased to younger than 18 (previously 17)
3. The credit amount increases to $3,000 (ages 6-17) and $3,600 (5 and under)
4. Income phaseout ranges are reduced
5. Option for annual advance payment of child tax credit

EARNED INCOME CREDIT (EIC)

The changes to the EIC are primarily aimed at strengthening the credit for individuals with no qualifying children and,

for the tax year 2021, include:

1. Reduction in the applicable minimum age to 19 (24 and 18 in certain circumstances)
2. Removal of maximum age limit to claim credit (previously capped at age 65)
3. Increased the EIC maximum credit amount for taxpayers with no qualifying children
4. Increased earned income phaseout amounts for those without qualifying children
5. Certain MFS taxpayers may be able to claim credit
6. Increase in disqualified investment income test to $10,000 (up from $3,650)
7. Option to use 2019 AGI/Earned Income to determine 2021 credit if 2019 earned income results in higher credit

 

CHILD AND DEPENDENT CARE CREDIT

Changes to the Child and Dependent Care Credit make the credit available to more taxpayers as well as increasing the amount of qualifying care expenses subject to the credit.

1. This credit is now refundable
2. Increase in dollar amount for qualifying expenses to $8,000 for one qualifying child and $16,000 for two or more

(up from $3,000/$6,000).

3. Increase in applicable percentage to 50% (up from 35%)
4. Addition of 0% credit for taxpayers with income above the AGI phaseout threshold
5. Increase in the income threshold for the maximum applicable percentage to $125,000 (up from $15,000)
6. Established income phaseout range

EMPLOYER-PROVIDED DEPENDENT CARE ASSISTANCE

The act increases the exclusion amount of employer-provided dependent care assistance to $10,500 (half of such

amount for MFS). This amount is for the tax year 2021 and is up from $5,000 ($2,500 for MFS) in prior years.