2021 TAXES: 8 Things All Physicians Must Know

By Staff Reporters

CITE: https://www.r2library.com/Resource/Title/082610254


Here are eight things to keep in mind as you prepare to file your 2021 taxes.

1. Income tax brackets have shifted a bit

There are still seven tax rates, but the income ranges (tax brackets) for each rate have shifted slightly to account for inflation. For 2021, the following rates and income ranges apply:

Tax rateTaxable income brackets: Single filersTaxable income brackets: Married couples filing jointly (and qualifying widows or widowers) 
10%$0 to $9,950$0 to $19,900
12%$9,951 to $40,525$19,901 to $81,050
22%$40,526 to $86,375$81,051 to $172,750
24%$86,376 to $164,925$172,751 to $329,850
32%$164,926 to $209,425$329,851 to $418,850
35%$209,426 to $523,600$418,851 to $628,300
37%$523,601 or more$628,301 or more

Source: Internal Revenue Service

2. The standard deduction has increased slightly

After an inflation adjustment, the 2021 standard deduction has increased slightly to $12,550 for single filers and married couples filing separately and $18,800 for single heads of household, who are generally unmarried with one or more dependents. For married couples filing jointly, the standard deduction has risen to $25,100.

3. Itemized deductions remain the same

For most filers, taking the higher standard deduction is more practical and saves the hassle of keeping track of receipts. But if you have enough tax-deductible expenses, you might benefit from itemizing.

The following rules for itemized deductions haven’t changed much for 2021, but they’re still worth pointing out.

  • State and local taxes: The deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000. 
  • Mortgage interest deduction: The mortgage interest deduction is limited to $750,000 of indebtedness. But people who had $1,000,000 of home mortgage debt before December 16, 2017, will still be able to deduct the interest on that loan. 
  • Medical expenses: Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted in 2021. 
  • Charitable donations: The cash donation limit of 100% of AGI remains in place for 2021, if donations were made to operating charities.1
  • Miscellaneous deductions: No miscellaneous itemized deductions are allowed. 

4. IRA and 401(k) contribution limits remain the same 

The traditional IRA and Roth contribution limits in 2021 remain the same as in 2020. Individuals can contribute up to $6,000 to an IRA, and those age 50 and older also qualify to make an additional $1,000 catch-up contribution. If you’re able to max out your IRA, consider doing so—you may qualify to deduct some or all of your contribution.

The 2021 contribution limit for 401(k) accounts also stays at $19,500. If you’re age 50 or older, you qualify to make an additional $6,500 catch-up contribution as well.

5. You can save a bit more in your health savings account (HSA) 

For 2021, the max you can contribute into an HSA is $3,600 for an individual (up $50 from 2020) and $7,200 for a family (up $100). People age 55 and older can contribute an extra $1,000 catch-up contribution.

To be eligible for an HSA, you must be enrolled in a high-deductible health plan (which usually has lower premiums as well). Learn more about the benefits of an HSA

6. The Child Tax Credit has been expanded 

For 2021, the American Rescue Plan Act (ARPA) has temporarily modified the Child Tax Credit requirements and amounts for household incomes below $75,000 for single filers and $150,000 for married filing jointly. 

First, the ARPA has raised the age limit for dependents from 16 to 17. In addition, the child tax credit has increased from $2,000 to $3,000 for children age 6 through 17 and up to $3,600 for children under 6. If your income exceeded the above limits but was below $200,000 for single filers or $400,000 for joint filers, you’ll receive the standard child tax credit of $2,000 per child. 

The IRS began sending monthly advance Child Tax Credit payments to eligible families in July and sent its last advance in December. If your dependent didn’t qualify for the child tax credit, you may still qualify for up to $500 of tax credits under the “credit for other dependents” (see IRS Publication 972 for more details). Tax credits, which reduce the tax you owe dollar for dollar, are generally better than deductions, which reduce your taxable income. 

7. The alternative minimum tax (AMT) exemption has gone up

Until the AMT exemption enacted by the Tax Cuts and Jobs Act expires in 2025, the AMT will continue to affect mostly households with incomes over $500,000. Still, the AMT has investment implications for some high earners. 

For 2021, the AMT exemptions are $73,600 for single filers and $114,600 for married taxpayers filing jointly. The phase-out thresholds are $1,047,200 for married taxpayers filing a joint return and $523,600 for all other taxpayers.  

8. The estate tax exemption is even higher

The estate and gift tax exemption, which is indexed to inflation, has risen to $11.7 million for 2021. But the now-higher exemption is set to expire at the end of 2025, meaning it could be essentially cut in half at that time if Congress doesn’t act. 

The annual gift exclusion, which allows you to give money to your loved ones each year without incurring any tax liability or using up any of your lifetime estate and gift tax exemption, stays at $15,000 per recipient.

Don’t get caught off guard

As you prepare to file your taxes for 2021, here are a few additional items to consider. 

  • If you’re not retired, the 10% early withdrawal penalty that was waived for retirement account distributions in 2020 has been reinstated for 2021.
  • If you’re age 72 or older, make sure you’ve taken your required minimum distribution (RMD) from your retirement accounts or else you face a 50% penalty on any undistributed funds (unless it’s your first RMD, in which case, you can wait until April 1, 2022).

If you haven’t contributed to your retirement accounts already, now is the time. Review your earnings for the year and take advantage of any deductions that can lower your tax bill. Also, keep an eye on Washington for any last-minute tax changes that could affect your return before you file. Tax season will be here before you know it, and it’s never too early to start preparing.

1Operating charities, or qualifying public charities, are defined by Internal Revenue Code section 170(b)(1)(A). You can use the Tax Exempt Organization Search tool on IRS.gov to check an organization’s eligibility.


MORE: https://www.msn.com/en-us/money/taxes/a-historically-underfunded-irs-is-preparing-for-a-rough-tax-season-and-only-has-1-person-for-every-16000-calls-it-gets/ar-AASFVds?li=BBnb7Kz



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One Response

  1. When Married Filing Separately Will Save You Taxes

    The IRS considers taxpayers married if they are legally married under state law, live together in a state-recognized common-law marriage, or are separated but have no separation maintenance or final divorce decree as of the end of the tax year. Of the 150.3 million tax returns filed in 2016, the latest year for which the IRS has published statistics (at the time of writing), 3.07 million belonged to twosomes who filed separately.

    These partners reported individual income and expenses on individual tax returns.
    They had to agree on either itemizing expenses or using the standard deduction.
    By filing separately, their similar incomes, miscellaneous deductions or medical expenses likely helped them save taxes.

    Filing separately with similar incomes

    A couple may pay the IRS less by filing separately when both spouses work and earn about the same amount.

    When they compare the tax due amount under both joint and separate filing statuses, they may discover that combining their earnings puts them into a higher tax bracket.
    Their savings depends on a variety of other factors, however, including their investment situation and whether they have children.
    The “married filing separately” status cuts the deductions for IRA contributions and eliminates certain tax credits, among other tax breaks.

    Using miscellaneous deductions by filing separately (for tax years prior to 2018)

    Miscellaneous deductions can lower taxable income, but in order to enter them on Schedule A, they must add up to more than 2% of adjusted gross income (AGI).

    Spouses with union dues, job-search costs, tax-preparation fees and un-reimbursed business expenses may find their miscellaneous deductions don’t qualify when their higher combined income raises their AGI.
    A spouse who travel frequently for business could rack up a sizable tally in airline fees for baggage and itinerary changes that makes the miscellaneous deduction worth pursuing.

    Beginning in 2018, these types of miscellaneous expenses are no longer deductible.
    Filing separately to save with unforeseen expenses

    Adjusted gross income also determines if a couple can use un-reimbursed health care costs and casualty losses on Schedule A to save taxes.

    Unless out-of-pocket medical expenses exceed 7.5% of AGI for 2021, they don’t qualify as a deduction.
    Casualty losses must also total more than 10% of AGI and occur in a federally declared disaster area.

    The spouse with the loss or substantial medical outlay calculates deductibility against his or her own lower AGI when the couple files separate returns. When one spouse can lower taxable income this way, married filing separately might trim a couple’s overall tax burden.
    Filing separately to guard the future

    When you don’t want to be liable for your partner’s tax bill, choosing the married-filing-separately status offers financial protection: the IRS won’t apply your refund to your spouse’s balance due. Separate returns make sense to prevent the IRS from seizing a spouse’s tax refund when the other has fallen behind on child support payments.

    Couples in the process of divorcing may shun joint returns to avoid post-divorce complications with the IRS, while a spouse who questions her partner’s tax ethics may feel more comfortable living a separate tax life.

    Couples living in community-property states should consider state law when deciding how to file.



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