Ed Zurndorfer discusses these changes, as well as presenting automatic inflation adjustments to individual income tax brackets and other employee benefits thresholds and limits taking effect in 2021.
During 2020, Congress passed two important pieces of tax-oriented legislation in response to the COVID-19 pandemic. The more recent legislation, the Consolidated Appropriations Act of 2020, was signed into law by President Trump on Dec. 27, 2020. Some of the tax law changes apply to 2020, some changes affect more than one year, and other changes took effect starting Jan. 1, 2021. This column discusses these changes, as well as presenting automatic inflation adjustments to individual income tax brackets and other employee benefits thresholds and limits taking effect in 2021.
The following are the most important tax changes resulting from the Consolidated Appropriations Act of 2020, including which year(s) the changes take effect:
- Stimulus payments. A second of stimulus checks are currently being sent out by the US Treasury to eligible individuals. The payment is up to $600 per individual, and $1,200 for a married couple filing jointly plus $600 per qualifying child under age 17. The payments will “phase out” when a single tax filer’s 2019 adjusted gross income (AGI) exceeds $75,000 and when a married couple’s (filing jointly) 2019 AGI exceeds $150,000. For single filers without children, payments go to $0 when 2019 AGI reaches $87,000; for married couples filing jointly, payments go to $0 when their 2019 AGI reaches $174,000. Payments are sent by the US Treasury via direct deposit into the same bank accounts used by individuals to file their 2019 Federal income tax returns. Individuals whose AGI was too large in 2019 to qualify for the first round of stimulus checks earlier in 2020 but whose income dropped enough during 2020 to qualify for the second round of stimulus checks can claim their payments when they file their 2020 federal tax returns this spring.
- Unemployment compensation. The new law extends unemployment benefits. Although few federal employees lost their jobs during the COIVD-19 pandemic, some federal employees have spouses who may have lost their jobs during the pandemic and as a result, applied for and received unemployment benefits. Unemployment compensation is in fact considered taxable income and must be included as such on the 2020 Federal and in most states, state income tax returns. Any individual who received unemployment compensation during 2020 should receive a 2020 1099-G from their State Department of Unemployment Compensation. A copy of the 2020 1099-G will be sent to the IRS.
- Flexible spending accounts. Many federal employees contribute to health care flexible spending accounts (HCFSA) that reimburse employees for out-of-pocket medical expenses, such as deductibles, co-payments, and coinsurance. Some employees also own dependent care flexible spending accounts (DCFSA) that reimburse employees for dependent care expenses, such as day-care center, nursery school and summer day camp expenses. Both the HCFSA and the DCFSA are run through FSAFEDS. During 2020, many HCFSA and DCFSA participants did not use up all of their allocated contributions to their HSCFSA and DCFSA accounts because of the COVID-19 pandemic.* The IRS has limited ability to ease FSA rules, particularly the “use or lose rule” with respect to HCFSA and DCFSA allocated funds. But Congress did modify the FSA rules. In particular, participants in HCFSAs and DCFSAs can carry over unused funds from 2020 to 2021 and 2021 to 2022. For DCFSAs, the law extends the age limit for utilizing an DCFSA from age 12 to age 13 for some carried over funds. The FSAFEDS program is currently reviewing and will be shortly issuing the modification of rules to its program.
- Medical-expense deductions. The Consolidated Appropriations Act enacted a permanent threshold of 7.5 percent of adjusted gross income (AGI) for deducting medical expenses. Without this law change, the AGI threshold would have risen to 10 percent.
- Retirement plan withdrawals. The new law has a permanent provision allowing victims of officially declared natural disasters (such as hurricanes, tornadoes, forest fires) to make withdrawals of up to $100,000 from IRA and defined contribution plan assets, such as the Thrift Savings Plan. Any IRA owner or retirement plan participant who makes such withdrawals has the choice of including the withdrawn assets in taxable income or repaying the assets to the IRA or to the retirement plan over a period of as long as three years. Also, for individuals younger than age 59.5 who make IRA and/or qualified retirement plan withdrawals, the IRS’ 10 percent early withdrawal penalty does not apply.
- Charitable contribution deductions. The Consolidated Appropriations Act extended and expanded charitable contribution deductions for individuals who take the standard deduction instead of itemizing their deductions on Schedule A of their Federal income tax return. The expansion applies to charitable contributions made during 2021. The expansion allows single individuals to deduct up to $300 in eligible contributions and allows married individuals filing jointly to deduct up to $600. For 2021, the deduction reduces 2021 Federal taxable income whereas during 2020 the deduction reduces 2020 Federal adjusted gross income.
The following charts present important key-inflation-adjusted tax numbers, Social Security benefits related numbers, and retirement-oriented benefits for 2021:
2021 Federal Tax Bracket Thresholds
|Tax Rate||Single Taxable Income||Married Filing Jointly Taxable Income||Head of Household Taxable Income|
|10%||$0 – $9,950||$0 – $19,900||$0 – $14,200|
|12%||$9,951 – $40,525||$19,901 – $81,050||$14,201 – $54,200|
|22%||$40,526 – $86,375||$81,051 – $172,750||$54,201 – $86,350|
|24%||$86,376 – $164,925||$172,751 – $329,850||$86,351 – $164,900|
|32%||$164,926 – $209,425||$329,851 – $418,850||$164,901 – $209,400|
|35%||$209,426 – $523,600||$418,851 – $628,300||$209,401 – $523,600|
|37%||$523,601 and more||$628,301 and more||$523,601 and more|
Long-Term Capital Gains, Qualified Dividends
|Tax Rate||Single||Married Filing Jointly|
|0%||Up to $40,400||Up to $80,800|
|15%||$40,401 to $445,850||$80,801 to $501,600|
|20%||More than $445,850||More than $501,600|
2021 Estate and Gift Tax Exemptions
|Estate and gift tax||$11.7 million per individual|
|Annual gift tax exemption||$15,000 per recipient|
2021 Social Security Changes
Maximum Taxable Earnings
|Social Security (OADSI only)||$137,700||$142,800|
|Medicare (Hospital Insurance only)||No Limit||No Limit|
Quarter of Coverage
Social Security “Earnings Test” Exempt Amount
|Under Full Retirement Age (FRA)*||$18,240/year ($1,520/ month)||$18,960/year ($1,580/month)|
|The year an individual becomes Full Retirement Age (FRA)**||$48,600/year ($4,050/ month)||$50,520/year ($4,210/month)|
2021 IRA and Retirement Plan Contribution Limits
Retirement Plan Contributions Limits
|Traditional and Roth IRA||Up to $6,000 (plus $1,000 for individuals over age 49)|
|Thrift Savings Plan (TSP) (includes traditional TSP and/or Roth TSP)||Up to $19,500 (plus $6,500 for employees over age 49)|
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Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.