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BP - 2021 Taxes

2021 Tax Changes

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The Internal Revenue Service issued its annual inflation adjustments for tax year 2021.

  • The standard deduction for married couples filing jointly for tax year 2021 is increasing to $25,100, an increase of $300. For single taxpayers and married individuals who file separately, the standard deduction is increasing to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, also up $150.
  • The top tax rate stays at 37 percent for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are 35 percent, for incomes over $209,425 ($418,850 for married couples filing jointly); 32 percent for incomes over $164,925 ($329,850 for married couples filing jointly);24 percent for incomes over $86,375 ($172,750 for married couples filing jointly); 22 percent for incomes over $40,525 ($81,050 for married couples filing jointly); 12 percent for incomes over $9,950 ($19,900 for married couples filing jointly).  The lowest rate is 10 percent for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
  • The personal exemption for tax year 2021 remains at 0. This elimination of the personal exemption was part of the Tax Cuts and Jobs Act.
  • The minimum additional tax for failure to file a tax return within 60 days of the due date increased $330 to $435, or 100 percent of the amount of tax due.
  • There remains no limitation on itemized deductions.
  • The Alternative Minimum Tax exemption amount is $73,600 and starts to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200). The 2020 exemption amount was $72,900 and began to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption began to phase out at $1,036,800).
  • The maximum Earned Income Tax Credit amount is $6,728 for qualifying taxpayers who have three or more qualifying children, an increase of $68 from 2020.
  • The monthly limitation for the qualified transportation fringe benefit remains $270, as is the monthly limitation for qualified parking.
  • The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements remains $2,750. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $550, an increase of $50.
  • For tax year 2021 participants who have self-only coverage in a Medical Savings Account the plan should have an annual deductible no less than $2,400, but no more than $3,600, both are an increase of $50 from the prior year. For self-only coverage, the maximum out-of-pocket expense amount is $4,800, also up $50 from 2020. For participants with family coverage, the floor for the annual deductible is $4,800, up from $4,750 in 2020; however, the deductible cannot be more than $7,150, up $50 from the limit for tax year 2020. For family coverage, the out-of-pocket expense limit is $8,750 for tax year 2021, an increase of $100 from 2020.
  • The adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is increased $1,000 to $119,000.
  • The foreign earned income exclusion is $108,700 up from $107,600 for tax year 2020.
  • Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000, up from a total of $11,580,000 for 2020.
  • The annual exclusion for gifts remains at $15,000.
  • The maximum credit allowed for adoptions increased $100 to $14,440.
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Unreimbursed Employee Expenses

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The Tax Cuts and Jobs Act of 2017 eliminated the deduction for unreimbursed employee expenses, however, for most ministers, it still pays to keep track of them.  While the law did remove this schedule A deduction for employees, there is an exception for licensed ministers.

Unreimbursed employee expenses incurred by minsters are deducted on Schedule SE rather than Schedule A. The impact of this deduction reduces the amount of self-employment tax owed by a minster.  Some examples of deductible expenses include ministry or professional dues, educational fees, travel and mileage, religious materials, subscriptions, work related meals, etc.

Of course, if you have opted out of Social Security then you don’t file a schedule SE, so these expenses cannot be deducted.

While being able to deduct these expenses does help reduce self-employment taxes, the minster employee is still better off getting reimbursed from the church for all business-related expenses. If the reimbursement is properly documented, the reimbursement is tax free.  I would much rather get a 100% reimbursement than a 15% tax deduction.

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Tax Law Changes

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The Tax Cuts and Jobs Act of 2017 includes many changes, including reducing the tax rates of seven different tax brackets.  Here are some other changes that may impact you:

  • The standard deduction increases to $12,000 for an individual and $24,000 for a family. This change is expected to decrease the number of people who itemize deductions from 30% to as few as 5%.
  • Miscellaneous expenses are no longer deductible (ie: tax preparer fees and un-reimbursed business expenses)
  • There is no longer a deduction per dependent.
  • The child tax credit increases to $2,000 per child under 17. Up to $1,400 per child is refundable.  You may also qualify for a new $500 credit for non-child dependents (called a Family Tax Credit). However, there are many restrictions, including that the dependent cannot earn more than $4,150 in 2018.
  • In 2018 you can deduct medical expenses that exceed 7.5% of your AGI (in 2019, it increases to 10%).
  • Moving expenses are no longer deductible (and they can no longer be reimbursed tax free).
  • The AMT limits have been significantly increased to limit the number of taxpayers subjected to it.
  • The estate and gift tax exemptions are doubled ($11.2 million in 2018).

Most of these changes expire in 2025, unless Congress extends them or makes them permanent.

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Year-End Contribution Reports

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This is a good time to review the rules for issuing year-end charitable contribution statements.

Charitable contributions must be reported and claimed in the year in which they are delivered to the charity. If you receive cash or a check after December 31st, it should not be included on the donor’s 2018 contribution statement. This is true even if the check is dated in December, but delivered in January.

For the purpose of determining the delivery date, a contribution that is mailed (postmarked) by December 31st, 2018 is considered delivered by that date and can be included on the donor’s 2018 contribution statement. However, if you receive a check in 2018 that is dated in January 2019, it must be held until 2019 and recorded as a 2019 contribution.

Not following these rules can jeopardize the tax exempt status of the church.

Each contribution statement should include the following statement: “No goods or services were provided in exchange for these contribution, except for intangible religious benefits.”

We suggest that you advise your donors to not file their 2018 income tax return until they have received a written acknowledgment of their contributions from the church. Under IRS rules, they may lose the deduction if they file their tax return before receiving the written acknowledgment from the church.

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2018 Mileage Rates and Tax Law Changes

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The IRS has released the new mileage reimbursement rates for 2018.   For business related travel, the new rate is $0.545 per mile.  Driving for medical may be deducted at $0.18/mile and mileage for service to a charitable organization is unchanged at $0.14/mile. Mileage for moving expenses is no longer deductible.

In last month’s article, we recommended that employees get reimbursed for all business related mileage and business expenses, rather than deducting them on their tax personal tax return.  Under the new tax law, miscellaneous deductions (which includes unreimbursed employee expenses and home office deductions) are no longer deductible.  This lost deduction begins for the 2018 tax year.

If, however, you file a schedule C, you can still deduct the mileage and home office deductions.  This  would apply to the self-employed,  and guest speakers, not to employees who receive form W-2.

Charitable donations are now deductible up to 60% of adjusted gross income (prior limit was 50%).

Finally, the 2018 HSA contribution limits increased to $3,450 for an individual and $6,900 for a family.  Those over 55 can contribute an additional $1,000.

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Deducting Business Expenses

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Everyone is anxious to see what is in the final tax bill currently being negotiated in congress.  While I don’t typically spend much time looking at tax law changes until they are finalized, there are some deductions that appear to be going away – including the deduction for unreimbursed business expenses (form 2106), this is where many deduct business mileage.

Whether or not this deduction is eliminated in the final bill, it is one that we typically discourage for the following reasons.  There are limitations to the amount that can be deducted on the tax return.  First, you must reduce the amount of the deduction by the percent of your income that is non-taxable (ie: housing allowance).  Second, the amount that is allowed after the housing calculation is further reduced by 2% of your adjusted gross income.  Many times, over half of the deduction is lost after these calculations.  Furthermore, the tax savings is only a small percentage of the remaining deduction.  I have seen a deduction of $8,000 net a savings of only $1,600 in federal and self-employment taxes.

Our recommendation is to have the church reimburse all business expenses, including mileage.  If properly documented, the reimbursement is tax free.  It is much more beneficial to get a tax-free reimbursement at 100% than to save 20% in taxes.