Everyone’s financial situation is different, so it can be a little difficult to determine exactly how your financial situation will be affected by the tax changes in place for 2021. However, what is important is knowing what these changes are, as there’s a good chance you might end up with more money in your pocket at the end of the day.Changes range from deadline adjustments to increases in income tax brackets and deductions. A lot has changed, and it’s important to be aware of changes to not only maximize your savings, but also reduce mistakes. No one likes to have the IRS contact them about fixing paperwork. As always, you can contact a tax attorney if you need assistance.
Big Changes to Note
COVID has caused some pretty big changes, including this main one: the tax deadline has moved. The IRS extended the federal tax return deadline to May 17, 2021. Another big change revolves around the standard deduction, which increased to $12,400 for singles and $24,800 for couples filing jointly. Income tax brackets have also gotten an increase, thanks to inflation.
Below are some other changes of which to be aware.
Standard Deduction Changes
When you’re doing your taxes, you have the option to take itemized or standard deductions. These deductions lower your taxable income. The former is more of a pain that the latter, but, if itemized deductions save you more money, then the hassle is worth it.
Note that the standard deduction has changed. If you’re single, it has changed from $12,200 to $12,400. Married filing jointly has changed from $24,400 to $24,800. Married filing separately has changed from $12,200 to $12,400, and head of household has changed from $18,350 to $18,650. Other deductions, including charitable, medical, business, EITC, and child tax credit, have seen changes as well.
Changes to Other Deductions
The CARES (Coronavirus Aid, Relief & Economic Security) Act is responsible for many of the changes below.
With the CARES Act, you can deduct up to 100% of your AGI (Adjusted Gross Income), in qualified charitable donations if you itemize deductions. If you take the standard, you can write off up to $300 of donations made in cash.
Medical bills are nothing new, but the pandemic made them even more prominent, as costly COVID-19 hospital visits put many Americans into the red. You can deduct medical expenses over 7.5% of your AGI, if you’re itemizing your deductions. So, if you make $150,000 per year, you can deduct out-of-pocket medical costs above $11,250.
Self-employed workers know that they can claim a lot of deductions on their tax returns, such as home offices and travel expenses. However, if you were working remotely, you are not able to claim this home office tax deduction. It is only reserved for those who are self-employed.
The Earned Income Tax Credit helps out people earning up to $56,844 during the tax year. 20% of taxpayers don’t file for the EITC, which is crazy, as it can save you a lot of money. Make sure to file for the EITC if you earn up to that $56,844 mark.
Child Tax Credit
Families can claim a tax credit of a maximum of $2,000 per qualified child. The income limits for claiming the credit are $200,000 for singles and $400,000 for married parents. The credit is refundable, which means families can get up to $1,400 for each kid as a refund. The American Rescue Plan will change this number in 2021, increasing the child credit to $3,000-$3,600 depending on how old the kid is.
COVID: What’s Taxable?
Plans like the CARES Act provided a lot of aid for Americans struggling to pay bills. However, which of this aid is taxable, and which is not?
If you received any of the three stimulus checks sent out, you’ll be happy to know that that money is not taxable income. It’s treated the same way as a refundable tax credit. Consider it an advance on your refund.
Paycheck Protection Program loans are designed to be forgiven, as long as you used them on business expenses. Money from the PPP loans that you used to pay off your expenses can be deducted from AGI. But, make sure you fill out your Small Business Administration loan forgiveness application. Otherwise, you won’t be off the hook to repay the PPP loan.
The first $10,200 of unemployment benefits are tax-free, as long as your household income is under $150,000. This means that you might owe less than you originally thought on your taxes. If you have unemployment benefits of over $10,200, you have to report any excess as taxable income. For example, if you got $11,000 in unemployment benefits, you must declare that $800.
This list isn’t exhaustive, but it does hit on some of the biggest changes for the upcoming tax season. Our recommendation is that you contact a tax attorney or other tax professional to make sure you’re doing your taxes correctly and maximizing your savings.
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