News & Tech Tips

2021 Individual Taxes: Answers to your Questions About Limits

Many people are more concerned about their 2020 tax bills right now than they are about their 2021 tax situations. That’s understandable because your 2020 individual tax return is due to be filed in less than three months (unless you file an extension).

However, it’s a good idea to acquaint yourself with tax amounts that may have changed for 2021. Below are some Q&As about tax amounts for this year.

Be aware that not all tax figures are adjusted annually for inflation and even if they are, they may be unchanged or change only slightly due to low inflation. In addition, some amounts only change with new legislation.

How much can I contribute to an IRA for 2021?

If you’re eligible, you can contribute $6,000 a year to a traditional or Roth IRA, up to 100% of your earned income. If you’re 50 or older, you can make another $1,000 “catch up” contribution. (These amounts were the same for 2020.)

I have a 401(k) plan through my job. How much can I contribute to it?

For 2021, you can contribute up to $19,500 (unchanged from 2020) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older.

I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2021, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc., is $2,300 (up from $2,200 in 2020).

How much do I have to earn in 2021 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $142,800 for this year (up from $137,700 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2021?

A 2017 tax law eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800). For single filers, the amount is $12,550 (up from $12,400) and for heads of households, it’s $18,800 (up from $18,650). If the amount of your itemized deductions (such as mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2021.

If I don’t itemize, can I claim charitable deductions on my 2021 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. But thanks to the CARES Act that was enacted last year, single and married joint filing taxpayers can deduct up to $300 in donations to qualified charities on their 2020 federal returns, even if they claim the standard deduction. The Consolidated Appropriations Act extended this tax break into 2021 and increased the amount that married couples filing jointly can claim to $600.

How much can I give to one person without triggering a gift tax return in 2021?

The annual gift exclusion for 2021 is $15,000 (unchanged from 2020). This amount is only adjusted in $1,000 increments, so it typically only increases every few years.

Your tax situation

These are only some of the tax amounts that may apply to you. Contact us for more information about your tax situation, or if you have questions

Employee Retention Tax Credit Update

The Consolidated Appropriations Act, 2021 that was signed into law on December 27, 2020 includes several significant changes to the Employee Retention Tax Credit. 

 

The new law affects the credit for both 2020 and 2021. The most significant change is that taxpayers who previously received PPP funding that was forgiven (or is expected to be forgiven) can now also qualify for the Employee Retention Tax Credit.

 

Here are the key updates regarding the Employee Retention Tax Credit for 2020 for businesses who employed 100 or fewer employees in 2019, or paid employees who are not performing services in 2020:

 

  • Businesses with operations that were fully or partially suspended during 2020 due to government orders related to COVID-19 may qualify for the credit

 

  • Businesses with a 2020 quarterly decline of more than 50% in gross receipts when compared to the same quarter in 2019 may qualify for the credit

 

  • The maximum credit is 50% of the first $10,000 in wages paid to an employee between March 12, 2020 and December 31, 2020

 

  • Aggregation rules apply to the 100 employee limit

 

 

Here are the key updates regarding the Employee Retention Tax Credit for 2021 for businesses who employed 500 or fewer employees in 2019, or paid employees who are not performing services in 2021:

 

  • Businesses with operations that were fully or partially suspended during 2021 due to government orders related to COVID-19 may qualify for the credit

 

  • Businesses with a 2021 quarterly decline of more than 20% in gross receipts when compared to the same quarter in 2019 may qualify for the credit

 

  • The maximum credit is 70% of the first $10,000 in wages paid to an employee during the first quarter of 2021 and another 70% of the first $10,000 in wages paid to an employee during the second quarter of 2021. This allows for a maximum credit of $14,000 per employee over the first two quarters of 2021.

 

  • Aggregation rules apply to the 500 employee limit

 

The same wages that were used for PPP forgiveness or any other tax credit, such as the Work Opportunity Tax Credit, cannot be used for the Employee Retention Tax Credit. The new tax legislation also allows group health plan expenses to be considered qualified wages for the Employee Retention Tax Credit.

 

There are also new rules that allow businesses who were not in existence for all or part of 2019, or all or part of 2020, to be able to claim the Employee Retention Tax Credit.

 

The 2020 Employee Retention Tax Credit can be obtained by filing or amending the 4th quarter 941 tax return due January 31, 2020. The 2021 Employee Retention Tax Credit can be obtained by filing or amending the 1st quarter 941 tax return due April 30, 2021 and/or the 2nd quarter 941 tax return due July 31, 2021.

 

 

CLIENT RESOURCES:

 

We are providing two flowcharts that visually show the process of qualifying for the Employee Retention Tax Credit. One flowchart is for 2020 and the other is for 2021.

 

In addition, we are providing a questionnaire that can assist us in identifying if your company is a candidate for the Employer Retention Tax Credit.

 

Please complete the questionnaire and email it back to your advisor at Whalen & Company if you feel you may qualify for this tax credit. Your advisor can provide assistance navigating the new rules pertaining to the Employee Retention Tax Credit and help determine whether you qualify.

Commercial Activity Tax (CAT) Update

Due to Ohio statutes for Commercial Activity Tax (CAT) reporting purposes, in addition to regular revenue typically reported for CAT filing, businesses this year must also include:

 

  • The gross proceeds received from the 3 special BWC rebates issued in 2020 – issued around April, October and December

 

  • Grants received from Ohio, county or local jurisdictions

 

  • EIDL grants for the CARES Act

 

 

Please note that the Ohio Department of Taxation has specifically excluded forgiveness of PPP loans and employee retention credits, so these proceeds do not have to be included for CAT reporting.  

 

 

If you have any questions about this update or would like to discuss your situation specifically, please contact your Whalen advisor for assistance.