You may want to have the most updated pocket income tax act notes. That way, you could stay on top of any taxation policy changes that are relevant to your financial situation and refer to them when you need to. By doing so, you will avoid trouble with the IRS in the future.
Due to the Covid-19 pandemic, many changes have taken place concerning taxes. These changes are meant to enable everyone to navigate the unique financial difficulties that the pandemic has caused to taxpayers. But inflation has also played a role.
Below is a summary of the seven things that will be different within the 2021 tax returns.
1. Standard Deductions
The standard deductions you can claim when filing taxes for the year 2021 have been raised. That means you can get a bit more relief concerning what constitutes your taxable income. And how much you can deduct depends on your filing status. Below is a summary of those changes.
- For married individuals filing separately and single filers, the standard deduction is $12,550. Previously, it was $12,400.
- For married couples filing jointly, the standard deduction is $25,100. Previously, it was $24,800.
- For heads of households, the standard deduction is $18,800. Previously, it was $18,650.
2. Lifetime Learning Credit
If you, your spouse or dependent qualify for the lifetime learning credit by learning in an eligible institution, you could significantly reduce the impact of paying for your academic expenses like tuition.
But unlike many other kinds of tax credit, the lifetime learning credit is meant to reduce your tax bill dollar-for-dollar instead of reducing your taxable income. So long as you keep qualifying for the credit, you can claim up to $2,000 of tax relief per tax return.
However, there is an income limit that dictates who can qualify for the credit. For the 2021 tax year, the modified adjusted gross income (MAGI) limits have been increased to between $80,000 to $90,000 for those filing as single and twice that for those filing joint returns.
3. Charitable Deductions
Your ability to offer gifts and write them off has also changed. According to IRS rules, for the 2021 tax year, you can deduct cash donations to qualifying charities worth up to $300 when filing as a single and $600 when filing joint returns even if you claim standard deductions.
In addition, when making charitable deductions during itemization, you can apply them up to 100 percent of your adjusted gross income (AGI) for cash contributions made to qualified charities in 2021.
Also, corporations can now enjoy an increase in charitable deductions for of up to 25 percent of their taxable incomes. The limit not only applies when corporations contribute cash, but also when they donate food inventory.
4. Child Tax Credits
For families with children, the child tax credit limits have been increased. Where taxpayers could previously claim up to $2,000 per qualifying child, they can now claim up to $3,000 for similar dependents until they attain the age of 17 years. In addition, those with children under six can claim an additional $600 per qualifying child.
In addition, the 2021 income thresholds that apply to the child tax credit are now $112,500 for taxpayers filing as single and $150,000 for those filing jointly.
Also, some taxpayers may qualify for a child care credit which has increased up to $8,000 per qualifying child to a maximum of $16,000 for two or more dependents.
5. Retirement Distributions
For the tax year 2020, the required minimum distributions limits were set aside, but they are back with a vengeance for the 2021 tax year. And that means you must withdraw the specified amount based for someone your age from your retirement account or risk being hit with a 50 percent penalty.
Also, the early withdrawal penalty was waived in 2020 for those younger than 59.5 who wanted to withdraw money from their retirement accounts. Now, those penalties are back in full force for the 2021 tax year. So, you may need to pay an extra 10 percent if you withdrew some of your distributions earlier than you should have.
Read More: COVID-19 & Early Retirement Plan Withdrawal Taxes
6. Alternative Minimum Taxes Changes
No matter how many deductions or credits you claim, you must pay a minimum specified tax percentage. And that value is set by the alternative minimum tax (AMT), which ensures that wealthy taxpayers don’t abuse tax shelters and fail to pay some form of tax.
For the 2021 tax year, the income exempt from AMT has changed to $73,600 for heads of households or singles, $57,300 for married people filing separately and $114,600 for couples filing jointly. Anything above the stated amounts may be subject to AMT at a rate of 26 or 28 percent, depending on how much you earn.
For example, if you are single or head of household, you will pay 26 percent on any income below $199,900 and 28 percent above that. On the other hand, similar rules apply if you are married but filing separately and earn an income of $99,950, and if you are married filing jointly and earning at least $199,900.
7. Health Insurance Premiums
The 2021 tax year has also brought taxation changes to the way you pay health insurance premiums, especially if you are self-employed. You can now contribute pre-tax monies up to $3,600 as an individual or $7,200 if you have family coverage to a Health Savings Account (HSA)-qualified plan if you are under a high deductible health plan (HDHP).
In this case, the HDHP deductible limits are $1,400 for self-coverage and $2,800 for family coverage. And they also include out-of-pocket expenses that don’t exceed $7,000 a year for individuals and $14,000 for families
Also, based on the American Rescue Plan, there is no income cap for anyone who requires health insurance subsidies.
It would be wise to continue referring to your pocket tax act notes every time a new change is announced. You can never be too sure that what applied last year will apply for the tax year 2021 and beyond. So, it’s better to be safe than sorry.
- IRS.Gov: IRS provides tax inflation adjustments for tax year 2021
- IRS.Gov: 2021 Instructions for Form 8863
- IRS.Gov: Expanded tax benefits help individuals and businesses give to charity in 2021
- IRS.Gov: 2021 Child Tax Credit and Advance Child Tax Credit Payments — Topic C: Calculation of the 2021 Child Tax Credit
- Kiplinger: Child Care Credit Expanded for 2021 (Up to $8,000 Available!)
- AARP.Org: What Every Retirement Saver Needs to Know About 2021
- Bankrate: Alternative minimum tax 2020-2021: What it is and who has to pay
- IRS.Gov: 26 CFR 601.602: Tax forms and instructions. (Also Part 1, §§ 1, 223.)
- HealthInsurance.Org: Self-employed health insurance deduction
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