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Some Changes That May Affect Next Year’s Tax Return

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David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
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This past year may have been one of the most complicated tax seasons ever, but there are also recent updates that may affect your taxes when you file your return next year.

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Till Lauer.jpeg

A flurry of changes made by Congress in its budget and pandemic relief bill in December extended some temporary tax provisions for a year or more, and made other temporary rules permanent. These sorts of changes are often called “tax extenders” and can be challenging to keep track of, so you may have missed them in all the talk about stimulus payments and Covid-19 vaccine rollouts.

The American Rescue Plan, the pandemic relief measure signed on Thursday by President Biden, includes significant tax changes affecting, in some cases, 2020 as well as 2021 tax returns.

Here are a few of the earlier updates to keep in mind as you think about taxes you’ll pay when you file your tax return in 2022.

Charitable contributions. The December legislation continued, just for 2021, a $300 charitable deduction for filers who don’t itemize deductions on their tax returns. The measure also increased the maximum amount that married couples can deduct to $600. (The limit for 2020 was $300 per return, not per person.)

Typically, you can deduct charitable donations only if you itemize your personal deductions, rather than taking the standard deduction. But because of changes to the federal tax code made in 2017 through the Tax Cuts and Jobs Act, most taxpayers take the standard deduction.

The 2017 law roughly doubled the standard deduction, and abolished some itemized deductions. For 2020, the standard deduction is $12,400 for single filers and $24,800 for married couples filing jointly. (For 2021, it’s $12,550 for single filers and $25,100 for married couples filing jointly.)

People who do itemize their deductions can get an even bigger benefit from charitable contributions in 2021.

Under the 2017 tax law, donors who itemize can deduct cash donations of up to 60 percent of their income, through 2025. (After that, the maximum deduction is scheduled to revert to 50 percent of income.) But the CARES Act temporarily increased that limit to 100 percent of income, for 2020; the December law extended it for 2021. (The 50 percent rule still applies to noncash contributions.)

That means someone who was philanthropically minded could donate enough this year to “wipe out their entire tax bill,” said Cari Weston, director for tax practice and ethics at the American Institute of Certified Public Accountants.

Medical deductions. The December law made permanent — again — a lower threshold for deducting medical expenses. Taxpayers can continue to deduct unreimbursed medical expenses that exceed 7.5 percent of their income, instead of 10 percent. To take the deduction, filers must itemize.

The floor had been 7.5 percent before the 2017 tax law raised it temporarily to 10 percent, Ms. Weston said. The latest change reverts to the earlier rule. Still, she said, the deduction is of limited help for most people.

For instance, if you have adjusted gross income of $100,000, you can now take a deduction for medical expenses that exceed $7,500 ($100,000 multiplied by 0.075). If you had expenses of $10,000 in 2021, your deduction would be $2,500 ($10,000 minus $7,500). Under the prior rule, your expenses wouldn’t have exceeded the $10,000 cutoff, so you wouldn’t have qualified for a deduction.

Deductions for business meals. This one is more helpful to businesses, but it could apply if you’re self-employed and take clients to lunch or dinner. Businesses can deduct 100 percent of business meals for 2021 and 2022 (but not for 2020), instead of the usual 50 percent. This is aimed at helping out beleaguered restaurants that have suffered from restrictions during the pandemic. The deduction applies to client meals as well as to employees on business travel and must be for food and drinks provided by a restaurant.

“It helps boost the restaurant economy,” Ms. Weston said.

Changes to tax breaks for educational expenses. The December law also did away with the on-again, off-again deduction for tuition and related expenses, but expanded the income limits for the lifetime learning credit, a credit that covers many of the same costs, starting in 2021. The credit is worth up to $2,000 per tax return.

“This is a net positive for families,” said Mark Kantrowitz, the former publisher and vice president of research at Savingforcollege.com.

Often, he said, families were confused and took the deduction when they might have been better off taking educational credits. Tax credits are generally considered better than deductions because credits directly reduce the amount of tax owed.

Here are some questions and answers about the various tax changes:

Can I volunteer my time to qualify for the $300 charitable deduction?

No. To qualify, the donation must be made in cash (donations by checks and credit cards count) to an eligible charity. Volunteer hours, stock and donated goods don’t count.

Can I take the medical deduction if I paid for care out of a tax-advantaged health spending account?

No. Flexible spending accounts, health savings accounts and similar arrangements let you pay for medical costs with pretax money, so you can’t also take a tax deduction for the expenses, according to TurboTax.

Any other tax updates of interest?

Thinking about an electric motorcycle? The December law extended through 2021 the credit for “two-wheeled plug-in electric vehicles” that can go at least 45 miles an hour and are designed for use on public roads. The credit is 10 percent of the vehicle’s cost, up to $2,500.

Also, if you pay private mortgage insurance premiums (typically required if you make a down payment of less than 20 percent on a home purchase), an extension means you generally can deduct the premiums paid in 2021 — if you itemize deductions.

Correction: March 14, 2021: An earlier version of this article referred incorrectly to Mark Kantrowitz's affiliation with Savingforcollege.com. He is the former publisher and vice president of research at the site, not the current publisher.

A version of this article appears in print on March 13, 2021, Section B, Page 6 of the New York edition with the headline: How Relief Bills Can Affect Your Tax Bills.

c.2022 The New York Times Company

This New York Times article was legally licensed through AdvisorStream.

David M. Brenner profile photo

David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting