Understanding the Flurry of Recent Tax Changes
There have been enough tax law changes over the past 15 months to make anyone’s head spin. While many of the changes applied to a single year, several are applicable for several years so I wanted to provide a quick overview as the 2020 tax season comes to an end.
At the end of 2019, Congress passed the SECURE Act which permanently changed a number of rules regarding retirement accounts. Two of the most significant changes increased the required starting age for retirement account distributions from age 70.5 to age 72. It also changed the rules for inheriting retirement accounts. Previously, a beneficiary could typically extend withdrawals from the inherited account over their lifetime. Now (with few exceptions), beneficiaries need to withdraw all the money within ten years.
The original stimulus bill (i.e. CARES Act) passed in March 2020 didn’t have long-term tax law changes but the second stimulus bill from December included a couple of “permanent” changes. Over the past few years, the threshold for deducting medical expenses has alternated between exceeding 7.5 percent of your gross income and 10 percent of gross income. The second stimulus bill (officially know as the Consolidated Appropriations Act of 2021) permanently set the floor at 7.5 percent (unless Congress changes the law again!).
Another permanent change from the second stimulus bill was the elimination of the college tuition deduction but an increase in the income limits for the Lifetime Learning Credit so more families would be eligible for this credit to cover college expenses. One change, only effective for 2021, was an increase in the “above the line” charitable deduction for married couples from $300 to $600 (which was capped at $300 in 2020, regardless of filing status).
The latest tax bill, the American Rescue Plan passed in March with another round of stimulus payments (i.e. economic impact payments). For now, the tax changes are mainly limited to 2021 but they’re significant for anyone with children. The child tax credit was increased from $2,000 to $3,000 (or $3,600 for children under age 6). In addition, the child care tax credit maximum amount increased from $1,050 to $4,000. As with many tax credits, there are income limits so the higher your income, the smaller the credit.
Four major tax-related bills in 15 months is quite the feat! This doesn’t even include any proposals that may get passed this year which will further complicate your tax planning for 2021. While it would be nice to take a breather and stop thinking about taxes until next April, I think you’ll find it’s better to know now what changes may (or may not) affect you this year.