Tax Season 2021: What You Need to Know
Many of us are pleased to have 2020 behind us. As we move further into the new year, the IRS is encouraging taxpayers to file their tax returns in a timely manner. Although Tax Day was moved to July 15th in 2020, it returns to its original date this year. Individuals and businesses must file their 2020 tax returns or extensions by April 15th, 2021.
The U.S. government took many steps and initiatives to stimulate the economy and incentivize giving in 2020. It’s important that taxpayers understand how this impacts their tax return.
Income Brackets & Rates for 2021 Tax Season
Taxpayers fall into a specific tax bracket based on the amount of income they make. Tax rate, or the percentage of income paid in taxes, is determined by a taxpayer’s tax bracket. For 2020, the tax rates remain the same but the brackets are slightly higher to allow for inflation.
While this seems simple enough, it’s not as cut and dry as it appears. For example, an individual that earns $60,000 a year is in the 22% tax bracket. However, this doesn’t mean that they pay a flat 22% tax rate on their income. Instead, up to $9,875 of their income is taxed at 10%, $30,250 of their income is taxed at 12%, and the remaining $29,750 is taxed at 22%.
Increased Standard Deductions
When taxpayers file their taxes, they have the option of taking a standard deduction or itemizing their deductions. When a taxpayer chooses to itemize their deductions, they list out and calculate them one by one. While this can take a lot of time and effort, it makes sense to itemize if deductions total more than the standard deduction.
The standard deduction went up slightly in 2020 to allow for inflation. For the 2021 tax season, individuals can take a standard deduction of $12,400. Married couples filing jointly can take a standard deduction of $24,800.
Many taxpayers find it difficult to determine whether they should itemize or take the standard deduction. TMDL works closely with clients to make sure we use the most tax advantageous solution.
Tax Deductions & Credits for 2021
Tax deductions help lower how much income gets taxed. Tax credits reduce the total tax bill. While both provide significant benefits, refundable tax credits can result in a tax refund. If an eligible tax credit equals more than the total amount of taxes owed, the difference gets refunded to the taxpayer. However, it’s important to note that this does not apply to non-refundable tax credits.
The following details important tax credits and deductions taxpayers might want to claim on their 2020 tax return:
- Charitable Donations
In order to incentivize charitable giving, the CARES Act allows eligible taxpayers to deduct charitable donations up to 100% of their adjusted gross income (AGI). $300 allowed if using standard deduction.
- Medical Deductions
Eligible taxpayers can deduct medical expenses above 7.5% of their AGI
- Earned Income Tax Credit
This refundable tax credit was designed to help low- and middle-income workers
- Child Tax Credit
This refundable tax credit allows eligible taxpayers to claim up to $2,000 per child
How the Coronavirus Impacts Your Taxes
Although many people would like to forget about the pandemic, there’s a few things taxpayers need to keep in mind as they file their 2020 taxes.
- Paycheck Protection Program (PPP) Loans
This small business loan was meant to cover certain business expenses like payroll, rent, mortgage payment interest, and utilities. Businesses that took a PPP loan must apply for forgiveness with the Small Business Association (SBA) before the deadline.
- Unemployment Benefits
Taxpayers that received unemployment benefits in 2020 must pay income taxes on all money received.
- Education Expenses
In order to be tax-free, any money removed from a 529 or Educational Savings Account must be used for qualified educational expenses. Unfortunately, many schools went remote last year and issued refunds to students. Taxpayers need to deposit this money back in their account within 60 days to avoid paying a withdrawal penalty.
- Retirement Plans
The CARES Act allowed taxpayers under 59 ½ years of age to take up to $100,000 out of their 401K or IRA without paying a penalty in 2020. For taxpayers with a traditional IRA, the CARES Act allowed seniors to skip required minimum distributions (RMDs) without penalty in 2020.
Tax Planning & Preparation
At TMDL, we understand that changing tax laws and requirements can create confusion for taxpayers. We work directly with our clients to ensure they fully understand the deductions and credits available to them. Please contact us for advice with your tax planning and preparation.