5 Things You Need To Know About 2021 Tax Return
There’s no such thing as too early in terms of preparing for your tax return. Now that you’ve just finished this year’s tax filing season, it’s time to think about the following year. If you expect that everything will be the same as last year, then you have to consider this. The COVID-19 pandemic, along with other things, changed a lot for the 2021 tax year.
Don’t worry. Some of these changes are actually good for you. The sooner you know about it, the more time you will have to take advantage of them. Here are 5 ways your 2021 tax returns will differ from the previous year:
1. Standard Deduction
When you file your taxes, you can choose between itemized deduction or standard deduction. Calculating your deductions one by one takes more time and effort but is worth it if the itemized deductions exceed the standard deduction.
Wanna opt out of the hassle and choose standard deductions instead? No problem. In 2018, the Congress nearly doubled the standard deduction and mandated that it be increased each year for inflation. For the tax year 2021, it increased slightly even more.
The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100 (+$300 from 2020). For single taxpayers and married individuals filing separately, it rises to $12,550, (+$150 from 2020), and for heads of households, it will be $18,800 (+$150 from 2020).
Standard Deduction (2020 vs 2021)
|Married Filing Jointly||$24,800||$25,100|
|Married Filing Separately||$12,400||$12,550|
|Head of Household||$18,650||$18,800|
2. Tax Brackets
Although the tax rate remains the same, the tax brackets for 2021 are slightly wider than that of 2020 to account for inflation.
|TAX RATE||TAXABLE INCOME|
|Single||Married Filing Jointly||Head of Household|
|10%||Up to $9,950||Up to $19,900||Up to $14,200|
|12%||$9,951 to $40,525||$19,901 to $81,050||$14,201 to $54,200|
|22%||$40,526 to $86,375||$81,051 to $172,750||$54,201 to $86,350|
|24%||$86,376 to $164,925||$172,751 to $329,850||$86,351 to $164,900|
|32%||$164,926 to $209,425||$329,851 to $418,850||$164,901 to $209,400|
|35%||$209,426 to $523,600||$418,851 to $628,300||$209,401 to $523,600|
|37%||Over $523,600||Over $628,300||Over $523,600|
Take note that President Biden wants to increase the top tax rate to 39.6% starting 2022. This would apply to taxable income over $452,700 for single taxpayers, $481,000 for head of household, and $509,300 for married couples filing jointly.
3. Charitable Contribution Deductions
Typically, you could only cut off charitable deductions if you itemized your tax deductions. Now, you are allowed to write off up to $300 charitable deductions in cash for 2020 without itemizing. This is a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed in March 2020 in an effort to further encourage U.S. citizens to charitable giving.
When you filed your 2020 tax return this year, this $300 charitable deduction was for each taxable unit, whether the taxpayer is single or married. For the 2021 taxes, married people filing jointly can each take a $300 for cash donations, for a total of $600 charitable deductions.
If you do itemize your deductions, you are no longer subject to this $300 limit and can deduct cash donations to charity up to 100% (from previously 60%) of your adjusted gross income (AGI).
4. Medical Expense Deduction
Did you find yourself with hefty medical bills last year? This tax break might give you some relief. Last 2017’s tax reform law lowered the threshold for deducting medical expenses from the initial 10% of your income to 7.5% temporarily.
Thanks to the stimulus relief legislation passed in December 2020 which now permanently lowers the threshold, you are now allowed to deduct medical and dental expenses you paid for yourself, your spouse, and your dependents that exceed 7.5% of your AGI.
For example, if your AGI was $100,000, you can take away medical expenses beyond $7,500. Just remember that you have to itemize your deductions to write off those expenses on your tax return.
5. Lifetime Learning Credit
If you value learning and education, this one might excite you. The lifetime learning credit (LLC) is for qualified tuition and related expenses paid for undergraduate, graduate, and professional degree courses – including those for acquiring or improving job skills.
There is no limit on the number of years you can claim the credit which is worth up to $2,000 per tax return. Another good thing is, tax credits like this decrease your tax bill dollar-for-dollar, unlike deductions which only reduce your taxable income.
For 2021, Congress raised the income limits for LLC, phasing out at income levels starting at $80,000 for single filers and $160,000 for joint filers (from the previous $59,000 for single filers and $118,000 for joint filers).
Preparing for your business and individual taxes ahead of time will allow you to optimize your obligations. However, taxes can be overwhelming and requires you to understand the constantly changing tax policies. Getting help from a trustworthy tax expert would be a smart move.