What’s New for 2021 Tax Returns

Tuition and fees deduction not available. The tuition and fees deduction is not available after 2020. Instead, the income limitations for the Lifetime Learning Credit have been increased.

Economic impact payment—EIP 3. Any economic impact payment you received in 2021 is not taxable for federal income tax purposes, but will reduce your recovery rebate credit.

2021 recovery rebate credit. This credit is figured like last year’s economic impact payment, EIP 3, except eligibility and the amount of the credit are based on your tax year 2021 information.

Standard deduction amount increased. For 2021, the standard deduction amount has been increased for all filers. The amounts are: (1) $12,550 (Single or Married Filing Separately); (2) $25,100 (Married Filing Jointly or Qualifying Widow(er); and (3) $18,800 (Head of Household).

Above-the-line charitable contributions. If you elect to not itemize your deductions in 2021, you may qualify to take a deduction for charitable contributions of up to $300 ($600 in the case of a joint return).

Virtual currency. If, in 2021, you engaged in a transaction involving virtual currency, you will need to answer “Yes” to the question on page 1 of Form 1040 or 1040-SR. The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency.

Credits for sick and family leave for certain self-employed individuals. The Families First Coronavirus Response Act (FFCRA) helped self-employed individuals affected by coronavirus by providing paid sick leave and paid family leave credits equivalent to those that employers are required to provide their employees for qualified sick leave wages and qualified family leave wages. The COVID-related Tax Relief Act of 2020 extended the period during which individuals can claim these credits.

Extension and expansion of credit for qualified sick and family leave wages. The American Rescue Plan Act of 2021 (the ARP), enacted on March 11, 2021, provides that certain self-employed individuals can claim credits for up to 10 days of “paid sick leave,” and up to 60 days of “paid family leave,” if they are unable to work or telework due to circumstances related to coronavirus. Self-employed individuals may claim these credits for the period beginning on April 1, 2021, and ending September 30, 2021.

Expanded dependent care assistance. For 2021, the dollar limit on qualifying expenses increases to $8,000 for one qualifying person and $16,000 for two or more qualifying persons. The rules for calculating the credit have also changed; the percentage of qualifying expenses eligible for the credit has increased, along with the income limit at which the credit begins phasing out. Additionally, for taxpayers who receive dependent care benefits from their employer, the dollar limit of the exclusion amount increases for 2021.

Child tax credit. Under the ARP, the child tax credit has been extended to qualifying children under age 18. Depending on modified adjusted gross income, you may receive an enhanced credit amount of up to $3,600 for a qualifying child under age 6 and up to $3,000 for a qualifying child over age 5 and under age 18. The enhanced credit amount begins to phase out where modified adjusted gross income exceeds $150,000 in the case of a joint return or surviving spouse, $112,500 in the case of a head of household, and $75,000 in all other cases. If you (or your spouse if filing jointly) lived in the United States for more than half the year, the child tax credit will be fully refundable even if you don’t have earned income. If you don’t meet this residency requirement, your child tax credit will be a combination of a nonrefundable child tax credit and a refundable additional child tax credit, as was the case in 2020. The credit for other dependents has not been enhanced and is figured as it was in 2020.

Letter 6419. If you received advance child tax credit payments during 2021, you will receive Letter 6419. You will need the information from this notice to figure the amount of child tax credit to claim on your 2021 tax return or the amount of additional tax you must report on Schedule 2 (Form 1040).

Additional tax on excess advance child tax credit payments. If you received advance child tax credit payments during 2021 and the credits determined using Schedule 8812 (Form 1040) are less than what you received, you may owe an additional tax. Schedule 8812 (Form 1040) will be completed to determine if you must report an additional tax on Schedule 2 (Form 1040).

Premium tax credit (PTC). The ARP expanded the PTC by eliminating the limitation that a taxpayer’s household income may not exceed 400% of the federal poverty line and generally increases the credit amounts. In addition, in 2021, if you receive unemployment compensation, you are generally eligible to claim the PTC if you meet the other requirements.

Changes to the earned income credit (EIC). For 2021, there are several changes to the EIC: (1) Special rules apply if you are claiming the EIC without a qualifying child. In these cases, the minimum age has been lowered to age 19 except for specified students who must be at least age 24 at the end of the year. However, the applicable minimum age is lowered further for former foster youth and qualified homeless youth to age 18. Additionally, you no longer need to be under age 65 to claim the EIC without a qualifying child. (2) If you are claiming the EIC with a qualifying child, you should follow the rules that apply to filers with a qualifying child or children when determining whether you are eligible to claim the EIC even if your qualifying child hasn’t been issued a valid SSN on or before the due date of your return (including extensions). However, when determining the amount of EIC that you are eligible to claim on your return, you should follow the rules that apply to taxpayers who do not have a qualifying child. (3) The amount of the credit has been increased and the phaseout income limits at which you can claim the credit have been expanded. (4) If you are married but don’t file a joint return, you may qualify to claim the EIC if you live with a qualifying child for more than half the year and either live apart from your spouse for the last 6 months of 2021 or are legally separated according to your state law under a written separation agreement or a decree of separate maintenance and do not live in the same household as your spouse at the end 2021. (5) The amount of investment income you can receive and still be eligible to claim the EIC has increased to $10,000. (6) You can elect to use your 2019 earned income to figure your 2021 earned income credit if your 2019 earned income is more than your 2021 earned income. (7) File Schedule EIC (Form 1040) if you have a qualifying child. If you have at least one child who meets the conditions to be your qualifying child for purposes of claiming the EIC, complete and attach Schedule EIC to your Form 1040 or 1040-SR even if that child doesn’t have a valid SSN.

Forgiveness of Paycheck Protection Program (PPP) loans. The forgiveness of a PPP loan creates tax-exempt income, so you don’t need to report the income on Form 1040 or 1040-SR, but you do need to report certain information related to your PPP loan.

Personal protective equipment (PPE). Amounts paid for PPE, such as masks, hand sanitizer, and sanitizing wipes, for the primary purpose of preventing the spread of coronavirus, are qualified medical expenses. If the amounts were paid or reimbursed under a health flexible spending account, Archer medical savings account, health reimbursement arrangement, or any other health plan, the amounts are not deductible on Schedule A (Form 1040).

Standard mileage rates. The standard mileage rate allowed for operating expenses for a car when you use it for medical reasons is 16 cents a mile. The 2021 rate for use of your vehicle to do volunteer work for certain charitable organizations is 14 cents a mile and the rate for business use of a vehicle is 56 cents a mile.

Modified AGI limit for traditional IRA contributions. For 2021, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is more than $105,000 but less than $125,000 for a married couple filing a joint return or a qualifying widow(er); more than $66,000 but less than $76,000 for a single individual or head of household; or less than $10,000 for a married individual filing a separate return. If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work but you aren’t, your deduction is phased out if your modified AGI is more than $198,000 but less than $208,000. If your modified AGI is $206,000 or more, you can’t take a deduction for contributions to a traditional IRA.

Modified AGI limit for Roth IRA contributions. For 2021, your Roth IRA contribution limit is reduced (phased out) in the following situations: (1) your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $198,000. You can’t make a Roth IRA contribution if your modified AGI is $208,000 or more; (2) your filing status is single, head of household, or married filing separately and you didn’t live with your spouse at any time in 2021 and your modified AGI is at least $125,000. You can’t make a Roth IRA contribution if your modified AGI is $140,000 or more; (3) your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than zero. You can’t make a Roth IRA contribution if your modified AGI is $10,000 or more.

Business meals. Section 210 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides for the temporary allowance of a 100% business meal deduction for food or beverages provided by a restaurant and paid or incurred after December 31, 2020, and before January 1, 2023.

Qualified Disaster Distributions. Form 8915-F replaces Form 8915-E for reporting qualified 2020 disaster distributions and repayments of those distributions made in 2021 and 2022, as applicable, unlike in previous disaster years where distributions and repayments would be reported on the applicable Form 8915 for that year’s disasters. For example, Form 8915-D, Qualified 2019 Disaster Retirement Plan Distributions and Repayments, would be used to report qualified 2019 disaster distributions and repayments.

Qualified business income deduction. The simplified worksheet for figuring your qualified business income deduction is now Form 8995, Qualified Business Income Deduction Simplified Computation. If you don’t meet the requirements to file Form 8995, use Form 8995-A, Qualified Business Income Deduction.