Thanks to the Consolidated Appropriations Act, the American Rescue Plan Act (ARPA), and certain parts of the CARES Act, 2021 has come with a host of tax law changes. To keep you up to date, our Tax Law Changes 2021 series covers everything tax professionals should know to head into the new tax season with confidence.
Revisions to Form 1040 & Schedules 1, 2, & 3
IRS Form 1040 has only two minor changes this year. First, The line for charitable contributions is no longer considered an adjustment to income. It’s now a few lines lower, just beneath Line 11 for Adjusted Gross Income. Second, the section for the Earned Income Tax Credit has been expanded, specifically for the purposes of reporting 2019 income. (Last year, this information was printed in the margin).
1040 Schedules 1, 2, & 3
Schedules 1, 2, and 3 have undergone more major changes, each adding an entire extra page. Several types of income that would have been categorized as “Other Income” in years past will now be reported as specific line items on Form 1040 Schedule 1. Similarly, over 30 items that once would have been grouped into “Other Taxes” are now specific line items on 1040 Schedule 2. Schedule 3, for non-refundable credits and refundable credits and payments, has also been expanded to create specific line items for each credit.
Tax law changes for the Premium Tax Credit
Prior to the ARPA, the Premium Tax Credit (PTC) was calculated based on the cost of the second-lowest cost Silver Plan and yearly income. This limited monthly premium contributions for the taxpayer to between 2.07 and 9.78% of household income, depending on how their household income compared to the Federal Poverty Level (FPL). Anyone above 400% of the FPL would have to pay 100% of their premium costs.
For 2021 and 2022, Households above 400% may qualify for a credit that allows them to spend no more than 8.5% of their household income on their premium (based on the second-lowest cost Silver Plan.) Under the new calculations, households at 133% FPL or below will receive a 100% subsidy of their premium costs, and households between 133 and 400% will get a PTC on a sliding scale basis.
For 2021 only, anyone who qualified for unemployment benefits will be treated as if their income is 133% of the FPL for the purposes of the PTC, meaning they will receive a 100% subsidy of their premium cost (based on the second-lowest cost Silver Plan).
In 2020, taxpayers who received excess PTC were not required to repay it. This waiver has not extended to 2021, and any excess PTC must be repaid.
New provisions for 2021
The Consolidated Appropriations Act made certain business meals 100% deductible for 2021 and 2022. Fringe benefits like coffee and snacks are still only 50% deductible. To be 100% deductible the meals must come from a restaurant or catering service and can be either consumed at the restaurant, carried out or delivered.
2020 Tax law changes that have been extended or modified for 2021
In 2020, the CARES Act increased the charitable contributions limits for cash to 100% of AGI for individuals (from 60%) and 25% of taxable income for C-Corps (from 10%). The Consolidated Appropriations Act extends those limits through 2021.
The Consolidated Appropriations Act also extended the charitable deduction for taxpayers taking the standard deduction, allowing individuals to deduct $300. This year, MFJ couples can claim $600, whereas they were only able to claim $300 last year. This deduction has also been moved to a below-the-line deduction, which impacts the calculation of MAGI.
Sick and family leave for the self-employed
The sick and family leave benefits that were claimed on Form 7202 in 2020 have been extended for 2021. The eligibility requirements and daily dollar amounts are the same as last year, but there are other changes.
The 2021 tax year is divided into different periods for the purposes of these benefits. The first is the “carryover period” of January 1 through March 31, 2021. This period allows 10 days for sick leave and 50 for family leave, minus any leave days that were taken in 2020.
The “restart period” is from April 1 to September 31. The maximum allowed days resets to 10 days for sick leave and 60 for family, and any days used in 2020 or during the carryover period of 2021 do not count towards this limit. Form 7202 has been expanded to account for both of these periods.
Lifetime Learning Credit
The Consolidated Appropriations Act increased the income thresholds for the phase out range of the Lifetime Learning Credit to $80,0001 – $90,000 for unmarried individuals and $160,001- $180,000 for MFJ.
Tax items that Are eliminated for 2021
Tuition and Fees Deduction
This deduction has been permanently eliminated under the Consolidated Appropriations Act.
The provision that allowed the first $10,200 of unemployment benefits to be excluded from taxable income has expired. All unemployment benefits for 2021 are taxable.
Five year NOL (Net Operating Loss) carryback
The CARES act allowed for a five-year NOL carryback in 2020, which reduces tax liability for the five years prior to the loss and can result in refunds for those tax years. This provision has not been extended, and under the previous TCJA rules, NOLs must be carried forward instead.
Coronavirus retirement distributions
This popular provision allowed 2020 retirement distributions to be spread over three years for tax purposes. This option does not exist for distributions taken in 2021, though you will still record any distributions that were spread from the 2020 tax year to 2021.
Self-Employment tax deferral
The option to defer half of the Social Security portion of the Self Employment Tax does not exist in 2021 as it did in 2020.
Excess business losses
The CARES Act repealed the Excess Business Loss Limitation for tax years 2018 – 2020. In 2021, we revert to the TCJA rules, and the limitations are in effect once again.
New Tax Forms for 2021
Form 8915-F Qualified Disaster Retirement Plan Distributions and Repayments
This form replaces Form 8915-E. In 2021, Form 8915-E was widely used to report distributions from retirement plans because of the Coronavirus pandemic. Last year, taxpayers were permitted to spread the income recognition for Coronavirus related distributions from retirement plans and IRA’s over three years. This year, taxpayers will report the second third of the deferred Coronavirus related distribution amount on Form 8915-F.
Previous versions of Form 8915 only lasted for one year each, beginning in 2016 with Form 8915-A. Now, Form 8915-F will be a multi-year form for at least 2021 and 2022.
This form allows taxpayers to indicate that they’d like to communicate with the IRS using an alternative medium such as braille or audio files.
For more on tax law changes in 2021, be sure to check out Part 1 of this series, where we cover all the updates to refundable tax credits.