Paying taxes is one of the few constants in everyone’s financial life. Although you need to pay taxes every year, the ways that you calculate your taxes change annually.
Even in a normal year, there may be small changes in the ways that people file their taxes. But the COVID-19 pandemic has caused the tax code to change more than usual this year. For this reason, there are several tax law changes in 2021 that taxpayers should know about.
Some of these variations are due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act was a massive piece of legislation passed in 2020. This bill included $2.2 trillion dollars of relief for U.S. citizens.
The first round of stimulus checks was the result of this relief package. In addition to stimulus checks, the CARES Act provided hundreds of billions of dollars in aid for business loans and unemployment insurance. It can be difficult to navigate the subsequent tax law changes in 2021.
Below, we will examine five of the most important changes that you should know about when you are filing your 2020 taxes. There are new deductions, limits, and credits that can help you to secure a larger refund.
When filing your tax return, it is always best to speak with a tax preparation specialist.
Change #1: Non-Itemized $300 Charitable Deduction
This first change can help you to receive a more significant refund. The CARES Act included financial incentives for charitable giving. This was intended to help charitable organizations make it through the pandemic and to help people in need.
The IRS Commissioner noted that, “Our nation’s charities are struggling to help those suffering from COVID-19, and many deserving organizations can use all the help they can get.” This deduction is one of the more generous tax law changes in 2021.
Typically, charitable donations can only be written off if you itemize the deductions. Most people do not include this type of itemized write-off on their taxes.
In tax year 2020, the IRS is allowing taxpayers to deduct up to $300 in non-itemized charitable donations. You are eligible for this write-off even if you take the standard deduction.
If you choose to take this deduction, it is very important to keep good records. Most organizations will provide you with a letter of acknowledgment or receipt for your contribution.
Qualifying donations include ones made with cash, credit card, check, or debit card. Donations to most charitable organizations count toward this deduction. However, some do not.
Organizations that qualify for this deduction include:
- Religious charities
- Educational organizations
- Scientific groups
- Literary organizations
- Organizations working against cruelty to animals or children
The CARES Act included other provisions to support charitable organizations through the pandemic, as well. For instance, there are higher contribution limits for corporations.
This $300 deduction is one of the tax law changes in 2021 that provides a significant benefit to individual taxpayers. Almost 90% of taxpayers qualify for this deduction.
Change #2: No Tax Increase, But Some Bracket Adjustments
The good news is that the tax law changes in 2021 do not include a tax increase. Typically, income tax brackets adjust with inflation each year. This causes them to rise over time.
However, the U.S. tax brackets have risen this year. As a result, you may end up paying more in taxes, even without a change to your income.
For those filing as a single individual, the U.S. tax brackets are:
- The first $9,875 is taxed at 10%
- Incomes between $9,875 and $40,125 are taxed at 12%
- Incomes between $40,126 and $85,525 are taxed at 22%
- Incomes between $85,526 and $163,300 are taxed at 24%
- Incomes between $163,301 and $207,350 are taxed at 32%
- Incomes between $207,351 and $518,400 are taxed at 35%
- All incomes of $518,401 or more are taxed at a rate of 37%
For married people filing joint returns, the federal tax brackets are:
- The first $19,750 is taxed at a rate of 10%
- Incomes between $19,751 and $80,250 are taxed at 12%
- Incomes between $80,251 and $171,050 are taxed at 22%
- Incomes between $171,051 and $326,000 are taxed at 24%
- Incomes between $326,001 and $414,700 are taxed at 32%
- Incomes between $414,701 and $622,050 are taxed at 35%
- All incomes of $622,051 or more are taxed at 37%
If you owe more than you did in the previous year despite a stable income, consider investing into a health savings account (HSA). Contributions to your HSA will lower the amount of your income that is subject to taxes. If you have a high-deductible healthcare plan, you may qualify for an HSA.
Change #3: Employer-Based Student Loan Aid
According to information from the Federal Reserve, Americans hold over $1.7 trillion in student loan debt. Both payments and accruing interest on federal student debt have been paused for the remainder of the pandemic.
But the CARES Act also provides aid in the form of tax incentives for student loan repayment assistance programs (LRAPs). These programs allow businesses to pay toward their employees’ student debts. LRAPs were introduced several years ago. They are growing in popularity.
Before the pandemic, student loan assistance from an employer was counted as wages. This would result in an increased tax bill for businesses that took part in these programs.
These employer-based student loan payments have been categorized differently this year. For many workers, this is one of the most beneficial tax law changes in 2021. Section 2206 of the CARES Act provides tax incentives for employers who paid toward workers’ student debts in 2020.
The federal government has given businesses the option to pay up to $5,250 toward each employee’s loans. In cases in which employers pay, neither businesses nor workers will be subject to federal payroll taxes on the amount paid.
If your employer provided you with aid on your student loans, you will not owe any federal taxes on that money. These student loan payments can go to the employee or directly to their lender. This tax benefit is available for federal and private loans.
Many people feel that their student loans are unmanageable. The costs of higher education have been rapidly escalating for a number of reasons. If you feel that your debt is overwhelming, it might be a good time to refinance your loans.
Interest rates are currently very low. This makes it possible for many borrowers to renegotiate their loans and lower their long-term costs.
Change #4: Retirees Can Avoid Taxes on RMDs
Citizens who have reached 72 years of age are required to make annual withdrawals from certain types of retirement accounts. This includes 401(k) and IRA accounts. These withdrawals are known as “required minimum distributions” (RMDs).
RMDs are intended to prevent individuals from using accounts as a tax-avoidance strategy. Typically, RMDs are categorized as taxable income.
However, the CARES Act has changed this. Rather than considering RMDs to be tax-exempt, the legislation made them voluntary in 2020. If you are 72 or older and did not need the additional income from RMDs, you did not have to withdraw them.
Avoiding RMDs will lower your total amount of taxable income. This can lower your taxes and allow you to keep more of your own money. Many retirees can save more, thanks to these tax law changes in 2021.
Change #5: Increased Requirements for Itemized Deductions
When you file your taxes, you have two deduction options. Most people take a standardized deduction to reduce the amount that they owe. Alternatively, you can file itemized deductions if you believe that they will result in greater savings for you.
The vast majority of Americans file using the standard deductions. Some data suggests that around 90% of taxpayers opt to use the standardized deduction.
The standard deduction amount fluctuates annually. It typically increases to account for inflation. This is true in the tax year 2020, as well.
The standard deduction amount varies based on how you are filing. The amounts for the 2020 tax year are as follows:
- Filing as a single individual – $12,400 (increase of $200)
- Married couples filing a joint return – $24,800 (increase of $400)
- Married couples filing separately – $12,400 (increase of $200)
- Filing as the head of household – $18,650 (increase of $300)
Just because the standard deduction has increased does not mean that an itemized deduction is a bad idea. If you made a major purchase in 2020, an itemized deduction might save you money.
For instance, purchasing a home makes it possible to deduct the cost of some of the interest and fees from your mortgage.
Contact D&M Accounting Services
To be sure that you are getting the most out of these tax law changes in 2021, contact the professionals at D&M Accounting Services, we have plenty of experience in securing the maximum returns possible for our clients.
The CARES Act and other changes in the tax year 2020 can make filing a return very complicated. No matter how complex your financial situation may be, our tax preparation professionals can handle your return.
Do not miss out on the deductions, write-offs, and benefits for which you are eligible. The experienced tax return preparation specialists at D&M Accounting Services will make sure that you receive all of the advantages that you are due. Contact us today.