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The April 15th tax filing deadline is fast approaching, and that means the pressure to start your taxes is on. Unfortunately, you can’t just dive in headfirst – a few changes wait for you in the 2021 tax season. You can expect some variation in your IRA and 401(k) plans, your tax bracket, and more. If you want to make sure your taxes are done right, here are a few 2021 tax filing changes to keep in mind.
Increase to Standard Deductions
One of the first tax filing changes you’ll see in 2021 is the standard deduction adjustments. Itemizing comes with more variation than deduction since each amount changes depending on the taxpayer. While it can allow you to claim more expenses, most people prefer standard deductions. This is because itemizing doesn’t provide big tax breaks for the general population and involves more work on your end. So, for the average American, you’re probably looking at standard deductions, which have risen in 2021 thanks to annual inflation.
If you’re filing separately, including single taxpayers and separately filing married couples, you’ll be looking at a $12,550 deductible. Heads of the household can expect an $18,800 standard deduction, and those jointly filing will have a $25,100 deductible this year. That’s a $150 increase per person from 2020.
New contribution limits to employer-sponsored plans
Your retirement accounts are vital to your financial stability following your working years. It seems 2021 will not be a year that shakes them up all that much. In particular, the contribution limits to your IRA and 401(k) will not experience any change.
The limit to your IRA contributions will stay at $6,000 for anyone below the age of 50 and $7,000 for those above. Likewise, the 2020 401(k) contribution limit will stay at $19,500 for anyone under 50 and $26,000 for those older.
However, the income limits for those employer-sponsored plans do fluctuate between years. The contribution limits for a Roth IRA, for example, are increasing this year. Single tax filers can expect a $1,000 increase from $139,000 to $140,000 while joint filers will see a $2,000 increase from $206,000 to $208,000. Married couples filing separately will experience no changes from 2020.
Rise in income brackets
Another one of the tax filing changes you’ll see is a rise in income brackets. Your tax rate depends on the amount of income you bring in annually and your filing status. The U.S.’s tax system is a progressive scale, so you’ll have a different rate depending on those traits. They increase as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The parameters for these rates when filing individually are:
- 10%: Income below $9,950
- 12%: Income from $9,950 to $40,525
- 22%: Income from $40,525 to $86,3755
- 24%: Income from $86,375 to $164,925
- 32%: Income from $164,925 to $209,425
- 35%: Income from $209,425 to $523,600
- 37%: Income above $523,600 to $628,300
Those filing jointly follow these guidelines:
- 10%: Income below $19,900
- 12%: Income from $19,900 to $81,050
- 22%: Income from $81,050 to $172,750
- 24%: Income from $172,750 to $329,850
- 32%: Income from $329,850 to $418,850
- 35%: Income from $418,850 to $628,300
- 37%: Income above $628,300
If you’re a single filer who falls into the 24% tax bracket, you don’t pay that percentage on your overall income. It graduates so that you pay 10% on taxable income up to $9,950, 12% on income up to $40,525, and so on.
Changes to limits on Health Savings Accounts (HSA)
Those with certain high-deductible health plans (HDHP) can make tax-deductible contributions to a Health Savings Accounts (HSA). The latter gives the contributor the opportunity for tax savings, which can help cover HAS-eligible expenses like medical and dental care.
For 2021, the single coverage contribution limit is $3,600. For family coverage, the limit is $7,200. The minimum annual deductibles to qualify for an HDHP are $1,400 and $2,800, respectively.
Higher education savings adjustments
An educational tax credit, called the Lifetime Learning Credit (LLC), will be adjusted slightly in 2021. If a single taxpayer’s income is less than $59,000 in 2021 (or $119,000 for those filing jointly), then they’re eligible for this tax break. It allows a 20% credit on qualifying expenses of up to $10,000. Reduced credits are also available for singles with an income up to $60,000 or $139,000 for joint filers. While these numbers remain the same from 2020 for single filers, it’s up $1,000 for the latter group. You can use the credit to cover schooling expenses outside the standard system, including vocational training and other eligible nontraditional forms.
There are other ways to find educational savings, such as a 529 plan, although they remain the same as last year.
Changes to tax credits
Tax credits beat out deductions in value for the American taxpayer. Although the latter helps lower the amount of income subject to taxes, a tax credit is more direct. It reduces the overall tax bill you owe. So, to help minimize your 2021 tax costs, it’s important to know the most popular credit options.
Earned income credit
This credit benefits low- to mid-level income workers. The amount depends on your income and family size, with varying maximums. It’s $543 if you have no children, $3,618 if you have one child, $5,980 if you have two, and $6,728 if you have three or more. That’s a $5, $34, $60, and $68 increase, respectively, from 2020.
The income limits for this tax credit have also slightly increased since last year. The limit is determined based on the number of dependents claimed and your income filing status.
Saver’s credit
The saver’s tax credit is also designed for low- to mid-level income workers. It pays individuals a varying amount to encourage them to make retirement contributions. The amount depends on your income, entitling you to a credit of 10% to 50% of $2,000 in retirement contributions. If you exceed the limitation, you are not eligible for the credit. You can view the slightly shift 2021 saver’s credit income limitations at the IRS website.
Gift and estate tax exemptions
It’s vital to keep updated on the gift and estate tax lifetime exclusion amount for anyone involved in an estate plan. It determines the asset value you can pass on in your will without paying a tax. That amount has risen to $11.7 million in 2021, which is up from $11.58 million in 2020.
The annual gift-tax exclusion amount is unchanged from last year, at $15,000.
The takeaway
While tax filing changes may come with its many challenges, going in prepared will save you unnecessary stress. These are just a few of the significant changes coming your way this tax filing season. But, the more you understand these changes, the better off you’ll be. Remember that you can always keep up to date by checking in on the IRS official website.
And, working with a tax advisor can help you ensure you never miss a tax code change.
DA-001831.1
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