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 Association 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.
How Has the Pandemic Changed Your Taxes?
Nope. The so-called economic impact payments are not treated as income. In fact, they’re technically an advance on a tax credit, known as the Recovery Rebate Credit. The payments could indirectly affect what you pay in state income taxes in a handful of states, where federal tax is deductible against state taxable income, as our colleague Ann Carrns wrote. Read more.
Mostly. Unemployment insurance is generally subject to federal as well as state income tax, though there are exceptions (Nine states don’t impose their own income taxes, and another six exempt unemployment payments from taxation, according to the Tax Foundation). But you won’t owe so-called payroll taxes, which pay for Social Security and Medicare. The new relief bill will make the first $10,200 of benefits tax-free if your income is less than $150,000. This applies to 2020 only. (If you’ve already filed your taxes, watch for I.R.S. guidance.) Unlike paychecks from an employer, taxes for unemployment aren’t automatically withheld. Recipients must opt in — and even when they do, federal taxes are withheld only at a flat rate of 10 percent of benefits. While the new tax break will provide a cushion, some people could still owe the I.R.S. or certain states money. Read more.
Probably not, unless you’re self-employed, an independent contractor or a gig worker. The tax law overhaul of late 2019 eliminated the home office deduction for employees from 2018 through 2025. “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home,” the I.R.S. said. Read more.
Self-employed people can take paid caregiving leave if their child’s school is closed or their usual child care provider is unavailable because of the outbreak. This works similarly to the smaller sick leave credit — 67 percent of average daily earnings (for either 2020 or 2019), up to $200 a day. But the caregiving leave can be taken for 50 days. Read more.
Yes. This year, you can deduct up to $300 for charitable contributions, even if you use the standard deduction. Previously, only people who itemized could claim these deductions. Donations must be made in cash (for these purposes, this includes check, credit card or debit card), and can’t include securities, household items or other property. For 2021, the deduction limit will double to $600 for joint filers. Rules for itemizers became more generous as well. The limit on charitable donations has been suspended, so individuals can contribute up to 100 percent of their adjusted gross income, up from 60 percent. But these donations must be made to public charities in cash; the old rules apply to contributions made to donor-advised funds, for example. Both provisions are available through 2021. Read more.
“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, publisher of 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.