When you file your taxes, it's important to be aware of the new reforms that will apply for this year. The tax season vocabulary is also something worth understanding before getting started with filing. For example, the tax year stands for the previous calendar year. What you’re filing now is your tax report for 2021, while some of the changes introduced by the IRS are for 2022.
The tax code is an ever-changing landscape, making it difficult for individuals to keep up with the latest changes. Subtle shifts in legislation happen every year without warning, and these tiny tweaks may have large impacts on your taxes if you don't pay attention. In 2017 alone, there were two major updates that altered how Americans file their returns: The Tax Cuts And Jobs Act raised America's standard deduction while also increasing the amount of what could be protected from inheritance taxes when passed down through bloodlines. In 2020, CARES Act introduced multiple rounds of Economic Impact Payments as well as waived early withdrawal penalties.
If there are any doubts concerning your current tax situation, the best option is to consult a tax professional. And for now, here are some of the IRS tax changes to be aware of for the 2021 tax year.
IRS Tax Changes for the 2021 Tax Year
The changes in the tax code are sometimes subtle and may not be applicable to your situation. For example, there's no difference between 2020 and 2021 in terms of rates, however, there are some small shifts in tax brackets due to inflation. There are also changes in standard deduction as married couples now get $25,100 (it was $24,800 in 2020.)
It may seem like minor changes in the tax code, but they can have a big impact on your overall bill, so be sure to double-check anything if you are the one preparing your taxes.
Some of the changes to pay attention to include:
- Expanded Charitable Cash Contribution Write-Off. The TCJA made it reasonable for many taxpayers to take the standard deduction rather than itemize. As such, they were missing out on an opportunity that would allow them to write off charitable contributions. In the tax year 2020, it was allowed to write off $300 in charitable cash contributions for taxpayers who took the standard deduction. That means if you're married and claim yourself as your spouse's dependent on taxes, then each individual can write off up to 600 dollars. NB: Political contributions are not eligible for the write-off.
- Extenders on Certain Tax Breaks. The extenders allow for certain tax breaks that are scheduled to sunset in 2021, such as the deductible eligibility of mortgage insurance premiums and the $500 credit limit for qualified energy-efficiency home improvements.
- Advanced Child Tax Credit Payments. The early child tax credit payments brought much-needed economic relief for families. The full 2000 dollar credit per kid aged 6-17 increased to 3000$ and $3600 per kid under 5. As part of the CARES Act, families were given half ahead of the tax season, receiving it in monthly checks with an opportunity to claim the remaining half on the next tax return filed.
- Changes to Beneficiary IRA Inheritance. The IRS is now cracking down on those who inherited IRAs from non-spouses and expects them to last a lifetime. The SECURE Act requires anyone inheriting an IRA after January 1st, 2020, must empty the account within 10 years.
- Ability to Contribute to IRA Accounts. The eligibility rule for making contributions to an IRA account was previously limited only up until 70.5 years old, but beginning in 2020, anyone can now contribute and save.
This list doesn’t cover all the IRS tax changes. Make sure to speak with your preparer if there is anything on this list that applies specifically to how you will be taxed.
FAQ for the 2021 Tax Year
— Are stimulus payments taxable?
No, they are not.
— Is unemployment insurance taxable?
The unemployment benefits you receive are taxable, even if it is the special compensation authorized under CARES. People who receive unemployment insurance should get a Form 1099-G, which will be reported to the IRS. Tax rates can change as your income decreases, and you may be in a different tax bracket now than before.
— Are employer contributions to student loan debt taxable?
The CARES Act allows employers to give up $5,250 in order for their employees to pay down student loan debt. This money is not considered taxable income by the IRS.
The Final Word
With the recent changes to our tax code, it can be difficult for individuals who are switching jobs or have other personal situations. However you feel about filing your taxes year after year — speaking with an expert might make things easier.
In addition, you can always use helpful articles and resources we are sharing here on budgetsmarties.com
This is not legal, financial, or professional advice. Please consult a legal, financial, or professional advisor for your specific situation.
