Page 6 - Supplement to Income Tax TY2021

Recent Tax Developments*

Self-employed individuals are eligible to take for those who itemize deductions, which had been set
income tax credits equivalent to the employment to jump to 10% in 2021, has been made permanent.
tax credits claimed by employers for providing The 7.5% of AGI floor applies regardless of age.
COVID-19-related paid sick leave and paid family The exclusion from gross income for certain benefits
leave to employees. These individuals can elect to use provided to firefighters and emergency medical
their 2019 net earnings to figure the credit on their responders has also been made permanent.
2020 returns. Provisions with a 5-year extension. The exclusion
from gross income from the cancellation of home
Deductions for 2021 and 2022 business meals. To
give a boost to restaurant businesses, the new law mortgage debt applies through 2025. However,
allows a 100% deduction for business meals (food or starting in 2021 the dollar limit is capped at $750,000
beverages) provided by a restaurant in 2021 and 2022. ($375,000 if married filing separately).
Provisions with a 2-year extension. The 26% tax
Health and dependent care flexible spending credit for residential energy-efficient property, such as
arrangements (FSAs). The FSA rules have been solar heating and cooling, applies through 2022.
eased somewhat by allowing employers to let eligible Provisions with a 1-year extension. The rules for
employees make mid-year changes in 2021. This charitable contributions introduced by the CARES
means opting in, opting out, or changing salary Act for 2020 have been extended for 2021. This means
reduction contributions prospectively. Provided the itemizers can elect to deduct cash contributions to
plan allows it, unused amounts from 2020 or 2021 charity up to 100% of AGI. The $300 limit on the
may be carried over in full to the following year. above-the-line deduction for cash contributions by
Thus, unused 2020 amounts can be used in 2021, those who claim the standard deduction remains at
and unused amounts from 2021 can be carried over $300. However, in 2021, the limit is “per person” so
to 2022. Or, if the plan has a grace period (it cannot that joint filers can deduct up to $600. The maximum
also permit carryovers), the period for 2021 runs deduction on 2020 returns remains $300 “per tax
until December 31, 2021 (instead of March 15, unit” so that singles and joint filers have the same
2021). And for any employee whose participation deduction limit.
in a health FSA terminates in 2020 or 2021, such The deduction for mortgage insurance premiums
individual can continue to receive reimbursements by those who itemize has also been extended for
through the end of the plan year. For dependent care one year. The deduction is claimed on Line 8d of
FSAs, employees with a child who turned age 13 Schedule A.
during 2020 can use any unused funds from 2020 The tax credit for nonbusiness energy property
for dependent care in 2021, until the child turns applies through 2021. This credit is for installing
age 14. All of these changes are permissible; it’s up insulation, storm windows and doors, and other
to the employer to adopt these new rules. What has energy-saving equipment for a principal residence.
not changed is the dollar limit on reimbursements The credit is claimed on Part II of Form 5695. The
for 2021: $2,750 for health FSAs and $5,000 for overall credit is subject to a lifetime limit of $500 for
dependent care FSAs. all years after 2005, and this is after dollar limits for

Extensions of expired provisions. A number of tax specific improvements, such as the overall limit of
rules expired at the end of 2020. The following shows $200 for windows; see the Form 5695 instructions on
some of the provisions that have been made permanent, the expense limits.
that have been extended (and for how long), and that The health coverage tax credit of 72.5% of
have not been extended. premiums for trade adjustment benefit recipients and
Provisions that have been made permanent. The certain recipients of benefits from the Pension Benefit
7.5%-of-adjusted-gross-income (AGI) floor for Guaranty Corporation applies for one more year. The
determining the amount of deductible medical expenses credit is claimed on Form 8885.

4 | Supplement to J.K. Lasser’s Your Income Tax 2021