Staying up-to-date with tax changes can feel overwhelming, especially when you are unfamiliar with the process. Tax laws change regularly, and after a unique year of living through the pandemic and various economic crises and changes, there are a number of upcoming changes you should be aware of.
It may seem early to be thinking about filing your taxes for 2021, but preparation will get you far. Here are seven upcoming changes to tax laws that you should keep in mind as you prepare to file for 2021.
Typical Tax Adjustments
You should expect some small adjustments to the way the government processes taxes each year. These were relatively unchanged by the pandemic, but are still relevant to your tax filing needs in the coming year.
Every year, you should expect taxes to fluctuate due to inflation. Our incomes and the cost of living fluctuate over time and taxes reflect these changes.
If you’re married and filing jointly, you can expect your standard deduction to rise up to $25,100 (a $300 increase from last year).
If you’re single, or a married individual filing separately, you can expect your standard deduction to rise to $12,550.
If you’re filing as head of household, you’ll see a standard deduction increase of $18,800.
Just like in the previous section, inflation causes tax increases. We won’t go into the minute details of inflation here, as it can get tricky, but what you need to know is that you could be pushed into a new tax bracket (and therefore see tax increases) due to inflation.
Deductions and Credits Phase Out Adjustments
A phase-out is when certain credits and deductions change based upon your income bracket. Inflation affects this part of tax law as well, just as it affects your income bracket or other tax adjustments. Here’s what you can expect in 2021:
Earned Income Tax Credit
If you’re married and filing jointly, with three or more qualifying dependents, the maximum credit you will be able to claim is $6,728 for 2021. Phase-outs for this credit will begin at $57,414 of adjusted gross income for taxpayers under married filing jointly status. This, of course, varies by income bracket and the way you file. If you are a single filer and have no dependents, you can receive a maximum credit of $543 and phase-outs will begin at $15,980 of adjusted gross income.
Alternative Minimum Tax
You can expect to see higher exemptions and income phase-outs in 2021.
Changes to the Alternative Minimum Tax
Alternative Minimum Tax (AMT) exemptions are updated automatically with inflation. Exemption from the AMT for singles was $72,900 in 2020, and phase-outs began at $518,400. For 2021, the amount increased to $73,600 and phase-outs started at $.$523,600
If you are contributing to an individual retirement account (IRA), you can expect to see phase-out levels for deductions increase.
- For those actively contributing to their employer’s retirement plan, phase-outs for an IRA will occur between $66,000 to $76,000 if you are single, or head of a household. If you are filing jointly, phase-outs will occur between $105,000 and $125,000.
If you do not actively participate in an employer’s retirement plan, but your spouse does, phase-outs will range from $198,000 to $208,000 for those married filing jointly. If you are married and filing separately, the phase-out range does not adjust annually and stays between $0 and $10,000.
If you do not have, or do not participate in, a workplace retirement plan, phase-outs do not apply to you.
Adjustments Due to the Pandemic
The pandemic brought changes in our personal lives, and in our personal finances. Due to various financial programs and provisions made at the federal level during the pandemic, there are many adjustments for the 2021 tax year. Here are the federal tax changes:
The Consolidated Appropriations Act, 2021
The Consolidated Appropriations Act, 2021 was passed to provide further financial help for those impacted by the coronavirus pandemic, among other things. Tax provisions within this Act will impact how you file next year. Much of the Act focuses on extensions, deductions, expansions of tax-relief provisions, and other things related to pandemic relief packages.
Here are some key figures that came through this Act.
- Taxpayers received a $600 advanced payment of a tax credit ($1,200 if you are married and filing jointly), plus an additional $600 for each qualifying child.*
- Businesses can deduct 100% of certain meal expenses under the Consolidated Appropriations Act, 2021.
- PPE is a deductible expense for qualified teachers, as part of the $250 educator tax deduction.
- $300 tax deduction for cash charitable deductions was extended. For joint filers, it was increased to $600.
- Gross income will not include an amount equal to any forgiven amount of a PPP loan.
- Eligible expenses paid with forgiven PPP loans are fully deductible.
*The tax credit begins to phase out starting at $75,000 of modified adjusted gross income, or $112,500 for heads of household and $150,000 for those married and filing jointly.
Retirement Plan Distributions
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) brought various financial provisions for Americans in 2020. Under this act, those whose finances were affected by the COVID-19 pandemic were able to withdraw up to $100,000 from their retirement funds without incurring the typical 10% early withdrawal fee.
The penalty waiver and other relaxed rules only applied to 2020 and you could see changes to your 2021 taxes because of this.
Expired CARES Act Provisions
Many of the major components of the CARES Act expired in 2020. With this in mind, various coverage offered for unemployed people, for those paying student loans, and so on, may have expired since you filed your 2020 taxes.
Under the CARES Act, unemployed people received $600 weekly payments from the government. The Pandemic Unemployment Assistance program offered coverage for self-employed individuals who would otherwise not receive unemployment help. A second program extended the length of time these unemployment benefits were available from 26 weeks to 39 weeks.
These, and other provisions within the CARES Act, have expired.
That being said, some have been extended under the Consolidated Appropriations Act. Under this new act, employees can avoid taxes on student loan payments until December 31, 2021. Employers can also still receive subsidies if they offer to leave under the Family and Medical Leave Act through 2025.
If you want to get a jump start on your 2021 taxes, learn how to get the most out of your deductions, or you want to have someone file your taxes for you, call us.