The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2021 Income Tax Brackets
For 2021, the highest income tax bracket of 37 percent applies when taxable income hits:

• $628,300 for married individuals filing jointly and surviving spouses,
• $523,600 for single individuals and heads of households,
• $314,150 for married individuals filing separately, and
• $13,050 for estates and trusts.

2021 Standard Deduction
The standard deduction for 2021 is:

• $25,100 for married individuals filing jointly and surviving spouses,
• $18,800 for heads of households, and
• $12,550 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,100 or
• the sum of $350 plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,350 for married taxpayers and surviving spouses, or
• $1,700 for other taxpayers.

AMT Exemption for 2021
The alternative minimum tax (AMT) exemption for 2021 is:

• $114,600 for married individuals filing jointly and surviving spouses,
• $73,600 for single individuals and heads of households,
• $57,300 for married individuals filing separately, and
• $25,700 for estates and trusts.

The exemption amounts begin to phase out when alternative minimum taxable income (AMTI) exceeds:

• $1,047,200 for married individuals filing jointly and surviving spouses,
• $523,600 for single individuals, heads of households, and married individuals filing separately, and
• $85,650 for estates and trusts.

Expensing Section 179 Property in 2021
For tax years beginning in 2021, taxpayers can expense up to $1,050,000 in Code Sec. 179 property. However, this dollar limit is reduced when the Section 179 property placed in service during the year exceeds $2,620,000.

Estate and Gift Tax Adjustments for 2021
The following inflation adjustments apply to federal estate and gift taxes in 2021:

• the gift tax exclusion is $15,000 per donee, or $159,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $11,700,000; and
• the maximum reduction for real property under the special valuation method is $1,190,000.

2021 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2021 is $108,700.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• lifetime learning credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date
These inflation adjustments generally apply to tax years beginning in 2021, so they affect most returns that will be filed in 2022. However, some specified figures apply to transactions or events in calendar year 2021.

The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.

The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.

Key Unchanged Amounts
The 2021 contribution limit remains unchanged at $19,500 for employees who take part in:

• 401(k) plans,
• 403(b) plans,
• most 457 plans, and
• the federal government’s Thrift Savings Plan

The catch-up contribution limit for employees aged 50 and over who participate in these plans also remains unchanged at $6,500.

The limitation for SIMPLE retirement accounts is unchanged at $13,500.

For individual retirement arrangements (IRAs), the limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment, and so remains $1,000.

IRAs and Roth IRAs
The income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs have increased for 2021.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or his or her spouse takes part in a retirement plan at work. The deduction phase out depends on the taxpayer's filing status and income.

• For single taxpayers covered by a workplace retirement plan, the 2021 phase-out range is $66,000 to $76,000, up from $65,000 to $75,000 for 2020.
• For married couples filing jointly, when the spouse making the contribution takes part in a workplace retirement plan, the 2021 phase-out range is $105,000 to $125,000, up from $104,000 to $124,000 for 2020.
• For an IRA contributor who is not covered by a workplace retirement plan but who is married to someone who is covered, the 2021 phase out range is between $198,000 and $208,000, up from $196,000 and $206,000 for 2020.
• For a married individual who is covered by a workplace plan and is filing a separate return, the phase-out range is not subject to an annual COLA and remains $0 to $10,000.

The 2021 income phase-out ranges for Roth IRA contributions are:

• $125,000 to $140,000 for singles and heads of household (up from $124,000 to $139,000 in 2020),
• $198,000 to $208,000 for married filing jointly (up from $196,000 to $206,000 in 2020), and
• $0 to $10,000 for married filing separately.

Saver’s Credit
The income limit for low- and moderate-income workers to claim the Saver's Credit under Code Sec. 25B has also increased for 2021:

• $66,000 for married couples filing jointly (up from $65,000 in 2020),
• $49,500 for heads of household (up from $48,750 in 2020), and
• $33,000 for singles and married filing separately (up from $32,500 in 2020).

So, Rita's an EA... just what does that do for me? You can be assured Rita and other EA’s have your best interest ahead of personal gain. The Enrolled Agent license was created by Act of Congress due to fraudulent claims for property seized by the Government during The Civil War. EA’s, Attorneys and others representing claimants could fairly settle these claims for seized property. Today over 40,000 EAs nationwide provide tax preparation, representation, tax planning, and other financial services to millions of individual and business taxpayers. EAs adhere to a code of ethics and professional conduct and are required by IRS to take continuing professional education.

An enrolled agent (EA) is a federally licensed tax practitioner who has proven technical expertise in the field of taxation. Enrolled agents are empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service (IRS) for audits, collections, and appeals. Only EAs, attorneys, and certified public accountants (CPAs) may represent taxpayers before IRS.

How can an EA help me?

Enrolled agents advise, represent, and prepare tax returns for individuals, partnerships, corporations, estates, trusts, and any entities with tax-reporting requirements. The expertise of EAs in the continuously changing field of taxation enables them to effectively represent taxpayers audited by the IRS.

Privilege and the Enrolled Agent

The IRS Restructuring and Reform Act of 1998 allow federally authorized practitioners (those bound by U.S. Department of the Treasury Circular 230 regulations) a limited client privilege. This privilege allows confidentiality between the taxpayer and the enrolled agent under certain conditions. The privilege applies to situations in which the taxpayer is being represented in cases involving audits and collection matters. It is not applicable to the preparation and filing of a tax return. This privilege does not apply to state tax matters, although a number of states have an accountant-client privilege.

Are enrolled agents required to take continuing professional education?

In addition to the stringent testing and application process, the IRS requires enrolled agents to complete 72 hours of continuing professional education, reported every three years, to maintain their EA status. NAEA members are obligated to complete 90 hours per three-year reporting period. Because of the knowledge necessary to become an EA and the requirements to maintain the license, there are only about 40,000 practicing EAs.

What are the differences between enrolled agents and other tax professionals?

Only EAs are required to demonstrate to the IRS their competence in matters of taxation before they may represent a taxpayer before the IRS. Unlike attorneys and CPAs, who may or may not choose to specialize in taxes, all EAs specialize in taxation. EAs are the only taxpayer representatives who receive their right to practice from the U.S. government (CPAs and attorneys are licensed by the states).

Are enrolled agents bound by standards?

Enrolled agents are required to abide by the provisions of U.S. Department of the Treasury Circular 230, which provides the regulations governing the practice of EAs before the IRS. National Association of Enrolled Agents (NAEA) members also are bound by the NAEA Code of Ethics and Rules of Professional Conduct.

Why should I choose an enrolled agent who is a member of the National Association of Enrolled Agents?

The principal mission of the National Association of Enrolled Agents and its members is qualified, accurate, and ethical representation of the financial positions of taxpayers before governmental agencies. Members of NAEA must fulfill continuing professional education requirements that exceed the IRS required minimum. NAEA members comprise a strong network of experienced, well-trained tax professionals who effectively represent their clients and work to make the tax code fair and reasonably enforced.

How can I hire an enrolled agent?

The fastest way to locate an enrolled agent in your area is to visit www.naea.org. The ‘Find an EA’ function located on the home page will allow you to search instantly by locality or specialty. You also can reference your local phone book under the ‘Tax Preparation’ category and look for the phrase ‘Enrolled Agent,’ ‘Enrolled to Represent Taxpayers before the IRS,’ or the ‘EA’ credential following the name of the tax professional.

The "Nanny Tax" applies to employers of household employees, including but not limited to nannies. If you employ a nanny, home health care worker, or other household employee, read about your tax implications.

The IRS simplified filing requirements for employers whose only employees are household employees, such as nannies. (CT allows household employers to file employment forms annually instead of quarterly, except for unemployment forms, but otherwise requires the same filings as non-household employers.) For federal purposes, household employers file a Schedule H as part of their Form 1040 income tax return to report employee wages as well as Social Security, Medicare, and Federal Unemployment Taxes.

In addition, the household employer may choose to pay the employee’s share of Social Security and Medicare taxes from the employer’s own funds. (This choice is common for household employers paying a nanny.) If the employer does NOT choose to pay the employee’s share, she will withhold the employee portion (7.65% of wages) from each paycheck.

The household employee may request that her employer withhold federal and/or state income taxes. If so, the employee completes a Form W-4 and Form CT-W4 for her employer’s files.

The household employer and the employee must complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9 Employment Eligibility Verification no later than the first day of work. Get the form at www.uscis.gov. Keep the completed form with employer records.

If the household employer chooses to pay the employee’s share of social security and Medicare taxes and if the household employee does not choose to have federal and state income taxes withheld, the following summarizes the transactions between a household employer and the household employee:

•Household employer pays the household employee her gross wages via check weekly (most common) or biweekly with no withholdings deducted.

•By 31 January, the household employer gives her household employee her W-2.

•By 31 January, the household employer sends Copy A of all Forms W-2 to the Social Security Administration.

•By 15 April, the household employer files Schedule H as part of her Form 1040 to pay the Social Security and Medicare taxes for herself and her household employee (a total of 15.3% of wages).

For example, if the household employee receives checks totaling $10,000 during 2007:

•Take-home pay was $10,000.

•W-2 wages will be $10,765 to include the 7.65% household employee share of Social Security and Medicare the household employer will pay for her.

•The household employer will remit an additional $1,530 plus federal unemployment tax (8% on the first $7,000 with credit subtracted for timely state payments) to pay her share of payroll taxes as well as the household employee share of social security and Medicare taxes.

The household employEE will make quarterly estimated payments to cover her estimated federal and state income taxes due or adjust other withholdings.

The household employER will make quarterly estimated payments to cover her own estimated federal and state income taxes as well as her Schedule H payroll taxes or adjust other withholdings.

The household employer must contact CT to receive state unemployment filing forms.

See IRS Topic 756, Publication 926, and Instructions for Schedule H available on www.irs.gov.

Rita Lewis will highlight issues that have been of concern to her clients.  Rita's Blog:  2020 Update on tax laws...  

BREAKING NEWS:

They did it, again and again!! Read the separate articles to learn what the new 2020 laws mean for 2019 income tax returns, as well as learn what 2019's SECURE Act will mean to you over the next decade. Included in that law are EXTENDERS of previously expired laws, extenders that are retroactive to 1 January 2018. Yes, 2018. (Amendments.) That new tax law, the still-current-for-most-of-this-decade Tax Cuts & Jobs Act, and revised tax forms AGAIN, mean we are all waiting on final tax guidance from Congress and for the IRS to catch up on their backlog this year. So, we preparers can catch up on our backlog.

And, they did NOT do it. Expect more new "clarifications" this year as well as over the next few years, so check back here daily to see the latest news for 2020 and for planning for the next few years. 

The revised withholding tables mean more in your take-home pay. But, that means your balance due or refund for 2019 with your federal return filed in 2020 may be an unpleasant surprise. If you don't like your 2019 results, change your 2020 withholding ASAP. The IRS has a new Tax Withholding Estimator:

https://www.irs.gov/payments/tax-withholding

Refunds are much, much slower as the IRS battles tax return fraud. And, even slower if you take Education, Child Tax, Earned Income Credits, or use Head of Household filing status. And, slower still if you file an amended return.

Also, expect your tax preparer to ask a LOT more due diligence questions if you want to take the American Opportunity, Child Tax, &/or Earned Income Credits, or use Head of Household filing status. EXPANDED questionaires are part of your tax return if claiming any of those credits or HoH filing status.

You NEED your Form 1098-T as well as a transcript from the bursar's office AND what YOU PAID to qualify for any Educational Credits or Deductions.

If you receive a Form K-1 for 2019 or future years, it will have additional information due to the new tax laws. And, it will take your tax return preparer more time to complete your returns.

Looking ahead for 2020 partnerships and S-corporations filing in 2021, those businesses MUST report cost basis information to their partners and shareholder/employees. Make sure your businesses report your basis information, because you MUST include it with your Forms 1040.

Remember that the IRS and the Social Security Administration/Medicare and CT and most states contact you via US Mail and NOT electronically. There are a lot of very aggressive email and telephone scams out there, including some targeting Medicare recipients. Do NOT pay anyone who claims to be from the IRS or Medicare or any governmental unit without calling me first. Newer scams target employees in human resource departments and request W-2 information. And, a new official-looking MAILING targets LLCs in CT and other states. I'm starting to see fake "IRS" mailings now, too. Read carefully!

CONNECTICUT

Repeat: A new official-looking MAILING targets LLCs in CT and other states. CT did NOT change how you file and pay your annual report to the Secretary of the State for your business.

CT continues to reduce the value of the property tax credit, and made new 2019 tax law changes. Pensions from the Retired Teachers' Board remain with a 25% reduction for CT tax purposes. A new 14% tax reduction for pensions and annuities helps residents UNDER CERTAIN INCOME LEVELS.

If you are part of a partnership or S-corporation, new CT laws were retroactive to 1 January 2018. Partnerships and S-corporations must pay estimated taxes to CT. Partners and shareholder/employees can make correspondingly lower payments to CT; they will get credit for a percentage of payments made by their pass-through companies to CT.

The CT Forms K-1 will have additional information due to CT's new tax law. And, it will take your tax return preparer more time to complete your returns.

CT also jumped on the problem of fraudulent tax returns, so don't be surprised if CT contacts you to prove your identity. This also means slower refunds.

CT's Department of Labor is taking a hard look at Independent Contractor vs. Employee issues.

NEW TAX LAW

Expect Many, Many Interpretations of our New Tax Laws! Effective dates are 2018 and later. Sunset date is the end of 2025.

The new tax laws and the revised tax forms AGAIN and the lack of clarification from Congress and IRS and state employees working from home mean your tax preparer will spend more time on your tax returns this year and next year, too. And, ask you a lot of new questions.

As usual, Congress gives and it takes away. Before you rely on any new law to change your tax position, call Rita Lewis at 203-557-0909 to learn if the law was in the signed version, or was extended or modified or expired or clarified, or if income phase-outs reduce the law's application to your specific situation.

CAUTION: Laws are still changing during 2020 for 2019 (and even 2018) and future tax returns.