Phaseouts of tax benefits are one culprit. They actually are stealth rate increases, pushing your marginal rate above the 37% bracket in the new law. That rate applies to taxable income over $523,601 for singles and $628,301 for married joint.
For 2021, as in 2020, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
For tax year 2021, the personal exemption remains at 0, as it was in 2019, this elimination was a provision in the Tax Cuts and Jobs Act.
Two other taxes for 2021 can increase your marginal rate:
The 0.9% Medicare surtax on high-earners. Singles owe it once earnings to $200,000...couples, over $250,000. It hits wages and self-employment income.
And the 3.8% Medicare surtax on net investment income...gains, interest, dividends, royalties and passive rental income. This levy starts to bite single filers with adjusted gross income over $200,000 and married couples above $250,000.
Marginal rates on long-term gains and dividends can be higher than expected.
If you are in the 10% or 12% tax brackets this year, gains and dividends are tax free until they push you into the 22% bracket...$81,051 to $172,750 of taxable income for couples and $40,526 to $86,375 for singles. Then they are taxed at 15% until your gains and dividends bump you into the 39.6% tax bracket, when the 20% top rate kicks in on the excess.
The 3.8% surtax raises the effective rate on tax-favored gains and dividends to 18.8% for filers below the 39.6% tax bracket and to 23.8% for upper-incomers.
The marginal rate can be even greater for high-incomers who owe the AMT.
Nominally, the 15% and 20% rates on gains and dividends also apply for the AMT.
But for filers in the phaseout zones for the minimum tax exemptions...from $1,047,200 of AMT income for couples and $523,600 for singles…the marginal rate is 6.5 or 7 percentage points more. So most filers hit by this cutback pay a marginal rate of 22% on their gains and dividends. And a good chunk of them end up owing the 3.8% Medicare surtax on top of that, boosting the rate to 25.8%. Let’s continue our review of the new tax law, on top of what we wrote January 4.
The 2021 withholding tables are out, reflecting the 37% top bracket.
The withholding rate on bonuses over $1 million is currently at 37% for 2021.
Trusts and estates will bear a higher income tax burden.
Trusts and estates is still at 3.8% Medicare surtax as well if their AGI exceeds $12,950 and they have any undistributed net investment income for 2020.
The Alternative Minimum Tax exemption amount for tax year 2021 is $99,950 and begins to phase out at $523,601 ($197,900, for married couples filing jointly for whom the exemption begins to phase out at $1,047,200). Trusts and Estates $25,000. In upcoming years, the exemptions will be adjusted for inflation, so the AMT rolls won’t grow dramatically.
The Adoption Tax Credit can be taken on up to $14,440 of costs for tax year 2021. The adoption tax credit income limit is based on modified adjusted gross income (MAGI) and is recalculated each year based on current cost of living. For the 2020 Adoption Tax Credit, the maximum amount available will begin to phase out for families with MAGI above $214,520 and will be unavailable to families with incomes around $254,520 or above.
Adoptive parents who work for companies with an adoption assistance program also receive a tax break. Parents can receive up to $14,440 in reimbursement from their employer for adoption expenses without paying taxes on that benefit. However, you cannot double-dip, meaning you cannot take a tax credit for adoption expenses already reimbursed by your company. Speak with a tax professional to make sure this is correctly noted in your W-2 Form.
The Tax Credit for energy-saving home improvements is 10% of cost up to $500 or a specific amount from $50-$300. Details: Must be an existing home & your principal residence. New construction and rentals do not apply. Biomass Stoves; Air Source Heat Pumps; Central Air Conditioning (CAC); Gas, Propane, or Oil Hot Water Boiler; Gas, Propane or Oil Furnaces and Fans; Insulation; Roofs; Water Heaters (non-solar); Windows, Doors & Skylights
Tax credits for Solar Energy Systems are available at 30% through December 31, 2019. The credit decreases to 26% for tax year 2020; drops to 22% for tax year 2021 then expires December 31, 2021. Details: Existing homes and new construction qualify. Both principal residences and second homes qualify. Rentals do not qualify. Geothermal Heat
Pumps: Small Wind Turbines (Residential); Solar Energy Systems.
The tax credit 30% of cost with no upper limit. Details: Existing homes and new construction qualify. Must be your principal residence. Rental homes and second homes do not qualify. Fuel Cells (Residential Fuel Cell and Microturbine System)
Two special rules affect direct transfers from IRAs to charity. The new law restored for 2012 the rule that folks 70½ and older can directly transfer up to $100,000 free of tax from their IRAs to charity.
Sec. 408(d)(8) permits “qualifying charitable distributions” from traditional IRA or Roth IRA accounts to be excluded from gross income. The provision first appeared in the Pension Protection Act, P.L. 109-280, in August 2006, as a temporary measure. In the intervening years it lapsed and was revived several times. The Protecting Americans from Tax Hikes (PATH) Act of 2015, P.L. 114-113, made it permanent. It is a powerful incentive to charitable giving, and through the use of life insurance, the ultimate amount the charity receives can be substantially increased.
A worker can be both an employee and an independent contractor of a firm, the IRS says privately in the case of a consultant who is engaged on separate projects. In such cases, the Service will examine each role independently, and FICA taxes apply only to the portion of pay attributable to an employer-employee relationship.
Replacing private disability pay with Social Security is bad for your tax health.
A disabled worker got tax free benefits under an insurance policy. However, he also was required to apply for Social Security disability and turn over the benefits to the insurer. The Tax Court ruled that he owes tax on the Social Security benefits, even though they are a substitute for nontaxable payments (Brady, TC Memo. 2013-1).
Bad news for a man who financed the purchase of a home and adjoining land: Interest on borrowings over $1.1 million isn’t deductible, the Tax Court says. He paid $1.8 million for the property, intending to subdivide it and develop a portion of the land. But the purchase contract didn’t allocate the cost between the residential and nonresidential portions. He can deduct the interest on $1.1 million of indebtedness as mortgage interest...$1 million of acquisition debt plus $100,000 of home equity debt.
He can’t write off the balance as investment interest (Norman, TC Memo. 2012-360).
Giving a family member a break on rent won’t always nullify a like-kind swap, the Tax Court decides. A landlord exchanged one rental home for another property that needed substantial renovations. His son, who had home building experience, fixed up the place and moved in with his family. The son paid below-market rent because he continued renovating the home during the four years he lived there. Thus, the low rent won’t nix like-kind-exchange treatment (Adams, TC Memo. 2013-7).
The tax implications of home foreclosures depend on the type of loan used. If a mortgage is nonrecourse, so the owner isn’t personally liable on it, the waived debt is included when figuring gain or loss on the transfer, the Revenue Service says. For primary homes, no loss is allowed, and only the portion of gain over the $250,000 or $500,000 exclusion is taxed. On a recourse mortgage, the forgiven debt is treated as income, unless the homeowner is insolvent right before cancellation. And if the loan is on the main residence, up to $2 million of debt forgiveness is deemed to be tax free.