It is almost the end of the financial year and the time to file taxes for the year 2021. With the changing economy across the globe, mainly due to the COVID-19 pandemic, many regulatory changes have been made for tax season 2021. Internal Revenue Services (IRS) have come up with credit and return reforms for the tax season. They have advised individuals and organizations to file federal taxes on time and as per requirements.
Here, we try to help you understand the reforms and changes incorporated and make the tax filing easy for you.
1. Last Date for filing taxes – As per IRS regulations, you can file your taxes latest by April 15, 2021, for tax season 2021, which may result in a penalty.
2. Tax Brackets – IRS has changed the tax brackets by a couple of hundreds for tax season 2021, though the tax rates are kept the same as for the previous year. The year 2020 marginal tax rates are defined at 10%, 12%, 22%, 24%, 32%, 35%, and 37% respectively. Updated tax brackets for the tax season 2021 is available at the IRS site for reference.
3. Standard Deductions – The standard deduction for tax season 2021 is redefined for different filing categories, as mentioned below:
- Individual – The standard deduction has been revised to $12,400 over $12,200 from previous years, giving a raise of $200.
- Married Couple filing jointly – Married couple filing jointly will get an advantage of $400 from a year earlier, raising the standard deduction to $24,800 from $24,400.
- Married Couple filing Separately – Same as Individual tax category.
- Head of Household – With an increase of $300, the standard deduction for tax season 2021 will be $18,650 over $18,350 over the previous year for the head of households.
4. Tax Deductions – As per IRS guidelines, some tax deductions are available, subject to itemized deductions, and some are available if the standard deduction option is chosen. Some of these are listed below for your reference –
- Charitable Deductions – If the itemized deduction option is selected, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows 100% adjustment along with other deductions adjustments. In the case of standard deductions, the CARES act allows deductions up to $300 if made in cash.
- Medical Deductions – Medical deductions are allowed in case of itemized deductions. Any deduction over 7.5% of adjusted gross income after taking out other adjustments will be considered for medical deductions.
- Business Deductions – Self-employed people can claim business deductions like travel expenses and home office expenses. People working for the organizations from home due to the pandemic will not be considered for business deductions.
- Earned Income Tax Credit – Specifically designed to cater to low and middle-income workers with earnings up to $56,844 for the tax year 2020, EITC helps save on taxes. EITC determines the saving on the income, number of children, and filing status.
- Child Tax Credit – IRS allows child tax credit up to $2,000 per eligible child under 17 as per income limit. The income limit for single parents is $200,000 and $400,000 for married couples. Child Tax Credit is a refundable credit and allows a receipt of up to $1400 per eligible child as part of a refund.
- Adoption Credit and Exclusions – IRS allows Adoption credit up to $14,300 for the expenses incurred for adopting a child if the child was adopted in the year 2020.
- Coronavirus Stimulus Checks – The stimulus check issued up to $1200 by the government as a part of corona relief under the CARES act will be considered a part of advance for any tax refund received for tax season 2021.
- Paycheck Protection Program (PPP) Loans – Loans availed under the PPP scheme during the pandemic time will be considered a part of taxable income as per IRS guidelines for the tax season 2021. Also, to make the loan to be forgiven, small businesses must get an approved application from the Small Businesses Administration.
- Unemployment Benefits – The IRS has set the mandate for tax payment on the unemployment insurance received as a part of the unemployment scheme for the COVID-19 situation for the tax season 2021.
- Educational Expenses – The loans undertaken under 529 Plans or Educational Saving Accounts (ESA), in case of course cancellation, result in taxable income if the loans are not returned under 60 days of cancellation. The IRS has provided the option to choose a new course under new 529 plans or pay any existing student loan debt up to $10,000 to avail tax saving on the amount.
Recommended Reading – What Should Small Businesses Expect from Tax Season 2021?
5. Under the CARES act, the IRS has allowed withdrawal of $100,000 for individuals under the age of 59 and ½ years without any early withdrawal penalty until the end of 2020. However, the withdrawal amount is taxable as ordinary income.
6. In the case of traditional IRAs, the CARES Act allows the senior citizens to skip Required Minimum Distributions (RMDs) in 2020 without any penalty. SECURE Act has pushed the age for RMDs from 70 and ½ to 72, resulting in substantial tax benefits for seniors.
7. The SECURE Act has allowed IRA owners to keep depositing money post the existing age limit of 70 and ½ years, allowing seniors to save money on tax-deductible.
The information mentioned above should be enough to take you through all the regulatory changes for the tax season and aid you in filing your taxes smoothly.
Want consultation for facilitating the tax process during this season? Get in touch with our Solutions Consultant at 1-855-ACE-IT-UP.