As 2020 comes to a close, we’re offering a quick refresher of changes under the Tax Cuts and Jobs Act, the SECURE Act and the CARES Act and directions on how these laws will impact the preparation of 2020 returns. The information below is part of a featured article in our January 2021 issue of the TAXPRO Monthly. Members can access the full reference guide for free.

Personal exemption

For 2018 – 2025, the personal exemption deduction for taxpayer, spouse and dependents is zero. However, the personal exemption amount for other purposes (for example, the qualifying relative gross income test) is $4,300 for 2020 and 2021.

Standard deduction

The standard deduction amounts increased; however, the additional amount for age or blindness remains the same in 2021.

For 2020 and 2021, the standard deduction for dependents who only have unearned income is $1,100. If the dependent has both earned and unearned income, the standard deduction is the greater of:

• $1,100, or
• The dependent’s earned income plus $350, but not more than the basic standard deduction for his or her filing status

Itemized deductions

For 2018-2025, the overall limitation (Pease limitation) on itemized deductions for taxpayers with AGI exceeding an applicable threshold does not apply.

Medical expense deduction: For 2020, medical expenses are subject to the 7.5%-of-AGI limitation regardless of age. This percentage was set to increase to 10% in 2021.

Capital gains rates

The top tax rate for capital gains and qualified dividends is permanently set at 20% for taxpayers with taxable income in the highest tax bracket. The net investment income tax (NIIT) of 3.8% makes the overall capital gain rate for higher income taxpayers effectively 23.8%. For tax years beginning after 2017, the 0% rate applies to capital gain below the maximum 0% rate amount. The 15% rate applies to capital gain at or above the 0% rate amount and below the maximum 15% rate amount. The 20% rate applies to capital gain at or above the 15% rate amount. These amounts will be indexed for inflation.

The ordinary income tax rates for short-term capital gain, the unrecaptured §1250 rate of 25% and the collectible rate of 28% continue to apply.

Additional Medicare tax

An additional Medicare tax of 0.9% applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income if such compensation exceeds the following threshold amounts, which are not indexed for inflation:

• $250,000 for MFJ
• $125,000 for MFS
• $200,000 for all others (SS, HH, S)

Net investment income tax (NIIT)

A 3.8% Medicare tax is applied against net investment income of individuals, estates and trusts. For this purpose, “individual” means any natural person, except those who are nonresident aliens. As such, NIIT applies only to citizens or residents of the U.S.

The NIIT is 3.8% of the lesser of:

• Net investment income for the year
• The excess of modified adjusted gross income over the threshold amount of $250,000 for MFJ and SS; $125,000 for MFS; and $200,000 for HH and S
• Estates and trusts do not have any threshold as defined in §1411. They pay tax on the lesser of undistributed net investment income or the amount of adjusted gross income that exceeds the highest tax bracket of $12,950 for 2020 and $13,050 for 2021.

Members can read the full article, which includes information on SALT deductions, alimony, charitable contributions, federal student loan payment relief, estate tax exclusion and the waiver of 10% penalty on retirement distributions in their January TAXPRO Monthly issue.