Page 8 - Supplement to Income Tax TY2021

Recent Tax Developments*

of an inclusion event or December 31, 2026. And if portion of Social Security taxes on net earnings from
there is an inclusion event, a rollover of gain from a March 27, 2020, through December 31, 2020, must
QOF to another QOF is permissible. Final regulations pay half the deferred amount by the end of 2021. This
issued in December 2019 (T.D. 9889) provide a list of may be factored into estimated taxes for 2021.
inclusion events, which include: All wages are subject to the Medicare tax withholding
• Inclusion events: A disposition of a QOF interest, rate of 1.45%. On Schedule SE, self-employed
gift of a QOF interest, transfer to a spouse incident individuals pay the Medicare tax of 2.9% (employee
to divorce, loss of QOF status (a decertification
of the fund as qualified, either voluntarily or and employer 1.45% shares) on all net earnings from
involuntarily), a partnership distribution of a self-employment. There is no ceiling for the Medicare
QOF to the extent that cash or the fair market tax, so it applies to all wages and net earnings from
value exceeds the partner’s outside basis in the self-employment for the year.
QOF, a QOF becomes worthless. Self-employed individuals claim 50% of the
• Non-inclusion events: Death (but heirs do
not get a stepped-up basis; they recognize the self-employment tax figured on Schedule SE as an
deferred gain no later than 2026), contribution above-the-line deduction on Schedule 1 of Form 1040
to a partnership. or 1040-SR.
In addition, employees and self-employed workers
Note that not all states allow for QOF deferral.
California and Massachusetts require state income tax will have to pay on Form 8959 the Additional Medicare
on gains from the sale of QOF investments. (Out-of- Tax of 0.9% on earnings over $200,000 if single, head
state investors in California with a QOF projects in of household, or qualifying widow/widower, $250,000
that state may also be subject to California income tax; if married filing jointly, or $125,000 if married filing
it’s not yet clear.) separately. These thresholds do not change annually,
as the statute authorizing the tax does not provide an
inflation adjustment.
Social Security & Medicare Taxes on 2021
Wages & Self-Employment Earnings
(pages 537, 546–547, 769–778) Medicare Part B and Part D Premiums for
2021 (page 641)
For 2021, Social Security taxes apply to the first
$142,800 of wages (up from $137,700 in 2020). Medicare Part B premiums cover eligible physician
Since the tax rate fixed by law is 6.2%, the maximum services, outpatient hospital services, outpatient
amount of Social Security that can be withheld from laboratory and diagnostic services, certain home
an employee’s 2021 wages is $8,853.60 ($142,800 × health services, and durable medical equipment.
6.2%). The employer must pay the same amount. Note: For 2021, the standard monthly Part B premium is
If your employer deferred your Social Security tax on $148.50, an increase of $3.90 from the standard
wages from September 1, 2020, through December premium ($144.60) that applied in 2020, and since
31, 2020, you will have additional withholding the premiums are deducted from Social Security
throughout all of 2021 to pay the deferred taxes. benefits, the increase provided by the 1.3% COLA
Self-employed individuals figuring self-employment (cost-of-living adjustment) in Social Security benefits
tax on Schedule SE will pay Social Security tax for 2021 will be limited by the higher Part B premium.
of 12.4% (both the employee and employer 6.2% For some Medicare beneficiaries with low monthly
share) on their first $142,800 of net earnings. To the Social Security benefits, the $3.90 increase in Part
extent self-employed individuals also have wages, the B premiums may exceed the 1.3% increase in their
Social Security tax applies to no more than $142,800 Social Security benefits, but the “hold harmless” rule
of wages and net earnings combined. Note: Self- prevents a net reduction in benefits from happening.
employed individuals who opted to defer the employer For such individuals, the “hold harmless” rule limits

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