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Each year brings changes to the tax code that will impact the amount you owe. Keeping up with these changes is a challenge, even for the professionals. Once again, the new tax filing season brings changes that you need to be aware of to maximize your refund or minimize the amount you owe. Many of the changes were a result of the American Rescue Plan and will impact a lot of tax returns. Below are just a few of the significant changes we think might impact you.
This typically changes every year, and the amounts are generally minimal. 2021 was no different. The standard deduction amounts were increased slightly for 2021 to account for inflation in 2020. Married couples get $25,100 plus $1,350 for each spouse age 65 or older. Singles can claim a $12,550 standard deduction — $14,250 if they're at least 65 years old. Head-of-household filers get $18,800 for their standard deduction plus an additional $1,700 once they reach age 65. Blind people can tack on an extra $1,350 to their standard deduction ($1,700 if they're unmarried and not a surviving spouse). The tax brackets were widened, but only by a few hundred (if that) each.
For 2021, they are:
2021 Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households
The American Rescue Plan boosted the child tax credit to $3,000 for families with kids 17 and under for 2021, with an extra $600 for children under age 6.
To qualify for the full credit, single filers need a modified adjusted gross income of less than $75,000 and married couples filing together must earn under $150,000. If advance payments have been received and income exceeds the limits, some of the credit will be due back when you file your return. If advance credits have not been received, you will be entitled to the credit when filing.
The American Rescue Plan also made significant improvements to the child and dependent care credit for the 2021 tax year.
For 2021, the child and dependent care credit is fully refundable. The maximum credit percentage also jumps to 35% to 50%. More of your care expenses are available for the credit, too. For 2021, the credit is allowed for up to $8,000 in expenses for one child/disabled person and $16,000 for more than one. When the 50% maximum credit percentage is applied, that puts the top credit for the 2021 tax year at $4,000 if you have just one child/disabled person in your family and $8,000 if you have more.
In addition, the full child and dependent care credit will be allowed for families making less than $125,000 a year (instead of $15,000 per year). After that, the credit starts to phase-out. However, all families making between $125,000 and $438,000 will receive at least a partial credit.
Congress increased health insurance premium subsidies in March for those purchasing coverage through the exchange, making coverage more affordable for millions of Americans.
Another change for 2021 is the return of required minimum distributions — amounts that must be withdrawn from most retirement accounts by a certain age — after being waived in 2020, but you need to get it out before Dec. 31 and if you don’t, the penalties are severe.
American Rescue Plan Act authorized a third round of stimulus checks. Those checks were for $1,400, plus an additional $1,400 for each dependent in your family with payments being phased out at certain income levels.
Unfortunately, some people who were eligible for a third-round stimulus check didn't receive a payment or got less than what they should have received. For those people, relief may be available in the form of a 2021 tax credit known as the recovery rebate credit.
2021 reverses the change made by The American Rescue Plan Act to unemployment compensation. In 2020, up to $10,200 of unemployment compensation ($20,400 for married couples filing jointly) exempt from federal income tax for households with an adjusted gross income less than $150,000. For 2021, all unemployment compensation is again taxable.
There are two higher education credits on the books. Generally, you can claim one or the other, but not both.
The maximum $2,500 American Opportunity Tax Credit (AOTC) is available for qualified expenses such as tuition, books, and other supplies required by the institution, for up to four years of study for every student in the family. It is phased out between $80,000 and $90,000 of modified adjusted gross income (MAGI) for single filers and $160,000 and $180,000 for joint filers.
With the Lifetime Learning Credit (LLC), you may claim a maximum credit of $2,000, but this applies on a per-taxpayer basis, Previously, the LLC was phased out at lower levels than the AOTC, but the CAA increases the ranges to the same as those for the AOTC, beginning in 2021.
The AOTC is usually preferable, especially with families with more than one child in school.
Normally, if a student loan is canceled, forgiven, or otherwise discharged for less than the amount you owe, the amount of canceled debt is considered taxable income. However, starting in 2021, this rule is suspended for most canceled student loan debt that was incurred for a post-secondary education. The change is only temporary, though. In 2026, forgiven student loan debt will once again be taxed.
If you're self-employed, there are some additional 2021 tax law changes that could impact your bottom line. For example, a key dollar threshold on the 20% deduction for pass-through income was increased for 2021. Self-employed people and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes in excess of $329,800 for joint filers and $164,900 for others.
There are far too many other changes to cover. Be assured that your tax professionals at Sloan know the rules and are here help you navigate the changes. We are open year-round and we are happy to assist in preparing for the upcoming season. Plus, our tax professionals are here full time to ensure you get the best service possible and the support you need - when you need it.