5 Tax Changes for 2021
5 Tax Changes for 2021 You Need in 2022
While you often hear that nothing is certain in life but death and taxes, taxes often feel uncertain due to constantly changing tax laws. With the added wrench of the pandemic, tax law changes have been even more challenging to keep up with for the average person.
Will the new tax changes benefit you, or have you paying more money? A tax professional can help you navigate the changes and implement the most appropriate tax strategies for your personal situation.
5 Tax Changes for the Tax Year 2021
As you’re filing your 2021 taxes in 2022, here are 5 tax changes for 2021 that you should be aware of that might impact your tax situation.
Inflation Adjustments to the Standard Deduction
The IRS often changes the standard deduction amount from year to year and 2021 was no different. With the increased inflation that impacted the economy, tax changes resulted to adjust for the inflation.
The standard deduction is the specific dollar amount that reduces your taxable income. You may claim a standard deduction if you do not itemize your deduction on your taxes.
Standard deductions vary by your filing status. In 2021, standard deductions are as follows:
- Single: $12,550
- Married Filing Jointly or Qualifying Widow(er): $25,100
- Married Filing Separately: $12,550
- Head of Household: $18,800
The standard deduction rates increased slightly, by $300 for married couples and $150 for the other categories.
Expanded Child Tax Credit
The Child Tax Credit was sent to eligible taxpayers by the IRS in 2021 under the American Rescue Plan. For taxpayers that received this credit, you can reconcile the payments you received and the credit that you are owed when you file your 2021 taxes. You will receive a letter 6419 from the IRS that details the amount you received in advance, if applicable. You can also check the Child Tax Credit Update Portal to see the amount you received and the potential credit you may be due.
This credit is based upon your income, and you may have received as much as $3,600 for children aged 5 and over.
Charitable Contribution Deduction Expansion
Previously, only taxpayers that itemized were eligible to claim charitable contributions as a deduction. However, in the tax year 2021 taxpayers that are claiming a standard deduction will also be able to write off charitable contributions as well.
This change is due to the CARES act, and if you’re filing as a married filing jointly couple, you can deduct up to $600 per person on your return. Single filers and other categories can deduct $300 for contributions to a qualified charity.
IRA Required Minimum Distributions
In 2021, the IRS once again required minimum distribution amounts for IRAs. This feature had been waived in 2020 as part of the CARES act to give a break to taxpayers 72 or older, but as of 2021 this is no longer the case.
This is especially important for taxpayers over 72 as you’re required to take a minimum distribution from any IRA account or 401(k) each year, called a required minimum distribution (RMD). RMDs are subject to income tax and if you did not withdraw the required amount in 2021 you might owe a 50% excise tax on the money that you failed to take out.
Unemployment Benefits Are Taxable Again
In 2020, the American Rescue Plan made a change so that in some circumstances unemployment benefits would not fully be considered taxable income. In 2021, this was not renewed. This means that for the 2021 filing year, any potential unemployment benefits you may have received are taxable income and you may have to pay taxes on them when you file this year.
Other Tax Law Changes in 2021
It’s worth noting that these are not the only tax law changes that may impact your 2021 filing. Tax-deductible medical expenses increased, and now you may deduct expenses for medical needs that exceed 7.5% of your adjusted gross income. The IRS also expanded the Earned Income Credit for 2021. Capital gains tax rates were adjusted for inflation, and the adoption credit was increased. In 2021, taxes are not owed on student loans if your student loans were forgiven. Income tax brackets were also raised due to inflation.
Tax Changes for 2021: How to Prepare in 2022
If your head is spinning with all of the changes, you’re looking at this tax season, give us a call. Dedicated tax professionals are here to help you navigate complicated tax laws and changes and we’re available to answer any questions that you have.
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