Here Are Must-Know Changes for the 2021 Tax Season
The 2020 tax season was frustrating, confusing, and overwhelming for many taxpayers. Pandemic relief bills resulted in numerous changes for tax filings. Some changes were limited to the 2020 tax years, while other changes were extended to 2021 and 2022.
If you had trouble keeping up with the changes for tax filings, you were not alone. Many tax preparers and IRS agents had trouble keeping everything straight.
As you prepare to file your tax returns, here are the must-know tax changes for the 2021 tax season from our Maryland tax attorney.
No Penalties for Student Loan Forgiveness
Student loan forgiveness is no longer considered taxable income by the IRS beginning with the 2021 tax year. This change to the tax law should continue through the tax year 2025. It could become permanent.
Furthermore, if your employer helped you reduce your student loan debts, you can exclude up to $5,250 from taxable income. This tax benefit is also extended through 2025.
Expanded Child Tax Credit for 2021
The American Rescue Plan increased the Child Tax Credit to $3,600 for children under six years and $3,000 for children over six years. In addition, the age limit for the Child Tax Credit increased from 16 to 17 years old.
Taxpayers qualify for the full credit if their modified adjusted gross income (AGI) was $75,000 or less for single filers. Married couples filing jointly can earn up to $150,000 AGI and receive the full credit.
If taxpayers earned more than the maximum AGI and received advance child tax credit payments, they may have to pay some of the tax credit back.
The IRS Tax Credit Update Portal confirms the advance payments you received.
Changes in Deductions for Medical Expenses
Taxpayers can deduct unreimbursed medical expenses that exceed a specific percentage of their adjusted gross income. The percentage has fallen somewhere between 7.5% and 10% of AGI.
For 2021, the “floor” is 7.5% of AGI. The lower “floor” could mean a higher tax deduction for medical expenses for some taxpayers.
Deductions for Cash Donations to Charities in 2021
The CARES Act allowed taxpayers to claim a $300 credit for cash donations to charity, even if they claimed the standard deduction. The charitable donation write-off was extended for 2021.
An individual can claim a $300 deduction for cash contributions to qualifying charities in 2021. In addition, married couples filing jointly may claim a maximum deduction of $600 on their 2021 tax return. Most cash contributions qualify for the deduction, but there are a few exceptions.
Cash donations that are not tax deductible include those that were:
Carried forward from previous years
Made to charitable remainder trusts
Paid to a support organization
Intended to help maintain or establish a donor advised fund
Paid to most private foundations
These exceptions apply to taxpayers claiming standard deductions or itemizing deductions.
Additionally, taxpayers who itemize deductions can qualify for a huge tax break. They can claim up to 100% of their AGI for cash contributions to qualifying charities in 2021.
The usual limit is 20 to 60 percent of adjusted gross income. However, the taxpayer must choose the new limit, or the old limit applies.
Higher Standard Deductions and New Tax Brackets for 2021
Higher standard deductions can mean a higher tax refund for many taxpayers. The standard deductions for 2021 increased to:
$12,550 for married couples filing separately and single filers
$25,100 for married joint filers
$18,800 for heads of households
Adults 65 years or older can add another $1,350 to their standard deduction per person if married and filing jointly ($1,700 for heads of households and single filers).
Tax rates did not change for 2021. However, the tax brackets expanded to offset inflation. It is not a huge change, but every little bit helps when you want to avoid a tax bill.
Required Minimum Distributions from Retirement Accounts
Required minimum distributions for most retirement accounts were withdrawn for tax year 2020. However, that benefit was not extended to the tax year 2021.
The IRS might charge you severe tax penalties if you did not take the required minimum distributions before December 31, 2021.
Increased Health Insurance Premium Subsidies
The American Rescue Plan also removed the income cap for health insurance premium tax credits through the federal health exchange for two years. There is an 8.5% credit on health insurance premiums based on your household income for 2021 and 2022.
Furthermore, taxpayers who received too much in subsidies in 2020 do not have required to pay back the excess amount. However, individuals may have to repay some of their benefits for 2021 if their earnings exceed the 2021 thresholds.
Claiming the Recovery Rebate Credit
Individuals who did not qualify for the third stimulus check or did not receive the full amount may be eligible for the Recovery Rebate Credit. However, taxpayers who received the full amounts for each stimulus payment are not eligible for the credit.
Retirement Contributions Limits Remain the Same
The contribution limits for Roth IRAs, 401(k) accounts, and traditional IRAs remain the same in 2021 as in 2020. You can contribute up to $6,000 in your IRAs. A $1,000 catch-up contribution is allowed for adults 50 and older.
The maximum contribution for 401(k) accounts is $19,500. The catch-up contribution for adults 50 and older is $6,500.
Higher Contribution Limits for Health Savings Accounts
The maximum contributions for your HSA increased by just $50 for individuals ($3,600) and $100 for families ($7,200). Adults 55 and older can make a $1,000 catch-up contribution.
Get Help Navigating the 2021 Tax Law Changes from a Maryland Tax Attorney
It is impossible to cover all tax changes for 2021 in one article. The must-know changes for the 2021 tax season discussed above apply to many taxpayers. However, changes to tax laws for 2021 could impact businesses, self-employed individuals, estates, trusts, and other taxpayers.
If you have questions about tax matters, contact our office to speak with our Maryland tax lawyer. We are here to answer questions, offer legal advice, and guide you through challenging tax issues. It is never too early to gather information to prepare for the upcoming tax years.
