Changes to 2021 Tax Season You Should Know About
The COVID-19 pandemic brought several financial changes to families in 2020: millions filing for unemployment benefits, receiving stimulus payments, and new revisions to the 2020 tax returns, which are filed during the 2021 tax season. According to the IRS, several tax provisions were changed or updated for those filing their 2020 tax returns, including new standard deduction amounts and higher income brackets.1
So, if you want to get ahead of the tax season, you’ll want to familiarize yourself with some of the biggest adjustments to the 2021 tax season, which will impact your 2020 tax return filing. Below, we’ve listed five new changes you should know about.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.
Top 5 Changes for the 2021 Tax Season
Before we dive into five changes to the 2021 tax season, we want to point out that if you received unemployment income and benefits this year, you may have to pay taxes on those funds. So even though there are more tax credits and deductions to take advantage of, you may still end up with a tax bill. Fortunately, you will not have to pay taxes on your stimulus payment if you received one.
With that aside, here are five new tax changes to take advantage of in 2021.
1. Standard Deduction Amounts
The standard deduction can decrease your overall tax bill by reducing your taxable income. You can think of the standard deduction as part of your income that isn’t taxed. The standard deduction usually increases every year because of inflation, and which standard deduction applies to you varies according to your filing status, whether you’re 65 or older and/or blind, and whether another taxpayer can claim you as a dependent, according to the IRS.
For 2020 tax returns, the standard deduction increased a little for each filing status. For married filing jointly, the standard deduction amount increased to $24,800. For single filers, the amount increased to $12,400, and for the head of household, the standard deduction amount increased to $18,650.1
2. Income Brackets
Tax brackets tend to increase every year, and 2020 is no exception.
Tax Year 2020 Marginal Income Tax Rates and Brackets
| 2020 Marginal Tax Rates | Single Tax Bracket | Married Filing Jointly Tax Bracket | Head of Household Tax Bracket |
| 10% | $0 to $9,875 | $0 to $19,750 | $0 to $14,100 |
| 12% | $9,876 to $40,125 | $19,751 to $80,250 | $14,101 to $53,700 |
| 22% | $40,126 to $85,525 | $80,251 to $171,050 | $53,701 to $85,500 |
| 24% | $85,526 to $163,300 | $171,051 to $326,600 | $85,501 to $163,300 |
| 32% | $163,301 to $207,350 | $326,601 to $414,700 | $163,301 to $207,350 |
| 35% | $207,351 to $518,400 | $414,701 to $622,050 | $207,351 to $518,400 |
| 37% | Over $518,401 | Over $622,051 | Over $518,401 |
Details sourced from taxfoundation.org
Keep in mind that these are marginal income tax brackets, which means that as your income increases and you reach the next income bracket, your full income won’t be taxed at the higher tax rate. For example, if you made $35,000 annually in one year, your tax rate is 12%. But, let’s say, the next year you received a $10,000 raise in your income. Now, because you make $45,000, you’re in a new tax bracket. Your tax rate is now 22%.
Although your income pushed you into a higher tax bracket, only a portion of your raise will be taxed at the new higher marginal tax rate of 22%, and a portion will be taxed at your current marginal tax rate (which was 12%).
So, using the example above, the first $5,525 of your raise is taxed at the 12% rate, and the remaining $4,475 is taxed at 22%. That means your tax obligation on your raise alone is approximately $1,647.50.
3. Waived Required Minimum Contributions
Suppose you or a loved one is over the age of 72 and has a retirement account. In that case, you might know that the federal government requires retirement account holders to take a minimum distribution from their accounts each year. This distribution is usually taxed. But due to the CARES Act, this year retirement account holders do not have to take a minimum distribution.2 This means that retirees may owe less in taxes when filing their 2020 tax return because they have lower taxable income.
4. Charitable Deduction
Although charitable deductions are usually permitted for individuals who itemize their deductions, this year, the CARES Act allows all taxpayers to deduct up to $300 in monetary donations in 2020, even for those that elect to take the standard deduction.3
5. Contribution Limits for Retirement Accounts and HSAs
Contribution limits for retirement accounts and health savings accounts (HSA) increased in 2020. The contribution limit for 401(k) plans is $19,500.4 The limit for HSA contributions is $3,550 for self and $7,100 for family.5 The contribution limit for employees who participate in 401(k), 403(b), and 457 plans has stayed at $19,500.4
Conclusion
Although this guide doesn’t walk you through all the new changes to 2020’s tax returns for the 2021 tax season, it does highlight some updates to deductions and contributions. Understanding all the differences can be a bit tricky, which is why we recommend hiring a tax professional who can help you take advantage of important deductions.
Sources:
- https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2020
- https://www.irs.gov/newsroom/irs-seniors-retirees-not-required-to-take-distributions-from-retirement-accounts-this-year-under-new-law
- https://crsreports.congress.gov/product/pdf/IN/IN11420
- https://www.aarp.org/retirement/planning-for-retirement/info-2020/401k-contribution-limits.html
- https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-2021-hsa-contribution-limits.aspx
