The year 2020 was like no other. The Covid-19 pandemic and the government’s response to the financial hardship it brought to most Americans mean that filing income taxes by April 15, 2021, will be different. Those differences are reflected in the coronavirus legislation and traditional inflation adjustments.
If you followed the advice in our previous article on-end-of-the-year tax tips to close out 2020, you may already be in shape to improve your tax position before April 15. What follows are other things you should know before filing your taxes this year.
Highlights for your April 15, 2021, tax filing
#1: The seven tax brackets continue for 2021
For example, if you are married and filing jointly and your taxable income is at least $19,750 but not more than $80,250, plan to pay a minimum of $9,235 plus 12% of the amount over $19,750. Those limits were slightly raised from $19,400 and $78,950 to adjust for inflation.
# 2: Standard deductions have gone up by $150
Married couples filing jointly can exempt the first $24,800 of their income from taxation. That amount increases another $1,300 if both filers are past age 65.
#3: Charitable deductions are available even if the standard deduction is taken
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows taxpayers to write off up to $300 in monetary donations in 2020, even if they choose the standard deduction.
#4: Required minimum distributions (RMDs) from retirement accounts waived
The CARES Act also waived the minimum distributions—the amount savers must withdraw—from retirement accounts for 2020. Those distributions count as taxable income and this one-time waiver will help lower some retirees’ income taxes in 2021.
#5: Higher limits for contributions to some retirement and health savings accounts
Base contributions for 401(k) plans rose $500 to $1,500. Catch-up contributions for taxpayers age 50 and older likewise rose another $500 to $6,500. Likewise, tax exempt contribution limits for health savings accounts went up $50 and $100 respectively for self-only and family coverage plans.
#6: Social Security payroll tax cap raised
The bad news for high earners is that the maximum amount of earnings subject to Social Security payroll taxes rose nearly $5,000 to $137,700.
#7: Little-known Savers Credit limits for low to middle income earners raised
Once known as the Retirement Savings Contributions Credit, the Savers Credit allows low- and moderate-income earners a tax credit of up to 50% of the first $2,000 they contribute during the year to a retirement account.
What about 2022 and beyond?
The new president wants to roll back the 2017 tax changes under the Trump administration. He has repeatedly said that he wants wealthy taxpayers for pay more of their “fair share.” We discussed the “fairness” issue and how everyone is affected when taxes are raised on business and commerce in a previous article.
In the meantime, taxpayers earning less than $400,000, probably won’t see a direct raise in their taxes—unless President Biden’s modern version of George H.W. Bush’s “Read my lips, no new taxes” takes him down the well-traveled road of broken election promises.
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