Filing Your Own Tax Return
Filing Your Own Tax Return – 7 Tax Changes for 2021
Just about every year tax changes bring a few surprises and 2021 will not be different. The key, however, is to plan for them properly. If you’re filing your own tax return, read on to find out what the changes are, planned phase outs, and adjustments for inflation.
There are a number of benefits for you with proper financial planning. Firstly, you’ll be better prepared to identify various adjustments you can make in preparing for the future. None of us has a crystal ball that is 100% accurate, but knowing when to make adjustments will allow you to respond properly.
When planning your year ahead financially, you need to understand which taxes will change, and how it will affect you. Phase out of certain deductions or income limits are just as important. Inflation adjustments can have a big effect too, especially if you know how to file taxes on your own.
The following summary will cover the 7 important items slated to change for 2021:
1. 2021 Consolidated Appropriations Act
This Act became law at the end of 2020. When it passed, it contained several provisions that will affect American taxpayers for the tax year 2021. If there’s one thing for certain, nothing remains the same in Washington when it comes to taxes.
A number of deductions and tax credits were scheduled to expire, and were extended. It also contained provisions to expand some of the tax relief packages already in effect. These were a part of the national response to the pandemic and certain disaster provisions for tax relief.
The law provides the following among the many items included in the Act:
a. A tax credit payment of $600 per taxpayer and also $600 for each of the taxpayer’s qualifying child. This payment is very similar to the first stimulus check on the phase out provision. Phase out would start at $75,000 of a taxpayer’s modified adjusted gross income.
b. The provision for a business to deduct 100% of certain expenses for meals was extended.
c. The deduction for qualified teachers to deduct $250 of educator expenses was clarified to include personal protective equipment, such as face masks. When filing your own taxes online, this cost can be included.
d. The $300 deduction for charitable cash contributions for those filing with the standard deduction was extended. For the tax year 2021, the deduction is increased to $600 for joint filers. If you do your own tax return, keep this in mind when you file your taxes electronically.
e. A clarification was made that a taxpayer’s gross income is not to include an amount that is equal to an amount of a forgiven Paycheck Protection Program loan. It also included a provision that any expenses incurred with forgiven PPP loans are fully tax deductible.
2. Inflation adjustments when filing your own taxes online
Over time, the cost of things we purchase gradually go up, and hopefully, our income as well. In order not to cause unexpected financial stress, the income tax system adjusts various items to compensate. The tax year, 2021 is no different.
Adjustments were made to the standard deduction, eligibility for various tax credits and deductions, and the income tax brackets. to compensate for inflation. The standard deduction will rise to $12,550 for single filers and $25,100 for married filing joint filers. When filing your own tax return with us, no need to worry, we have you covered.
Those who file as head of household will see their deduction rising to $18,800. If you’re filing your own tax return, keep those numbers in mind as you review your return for accuracy.
3. 2021 tax increases planned
To account for inflation, in 2021, eligibility for certain tax credits and deductions, the tax brackets, and the standard deduction will all be increased. One important change after the Tax Cuts and Jobs Act was enacted, is the method used by the tax code to calculate inflation.
Normally, inflation is tied to the consumer price index, but tax reform has changed that. It is measured by something I yet need to get a handle on, “chained CPI.”
This new terminology measures inflation in a slower and different way. They say that if a product or service has a large price increase, the consumer will not buy it. There are many economists that tend to disagree as to the accuracy.
Some say that the taxpayer could easily get pushed into a higher marginal tax bracket. This could happen because pay check increases for cost of living may outpace the chained CPI index.
4. Phase out of credits and deductions – No worry if you do your own tax return with us
As with the inflation adjustments, many tax credits and tax deductions will have their respective phase outs adjusted as required by the Act. One of the most popular tax credits is the Earned Income Credit. Our awesome program takes care of this for you when you’re filing your own tax return.
For a married couple filing jointly claiming 3 or more qualifying dependents, the maximum credit is $6,728 for 2021. The credit complete phases out when your adjusted gross income (AGI) reaches $57,414. For a single filer not claiming any dependents, the maximum amount of the credit is $1,502, and begins to phase out at $11,610 of AGI.
a. An adjustment was made to the alternative minimum tax too. We see higher exemptions and also income phase outs for 2021.
b. IRA contribution amounts are the same for 2021, but there is a change in phase out levels for active participants in their employer’s retirement plan. The phase out for a single taxpayer or a head of household filer begins at $66,000 and stops at $76,000. Joint filers phase out begins at $105,000 and stops at $125,000.
Different phase out levels are in place for taxpayers who don’t participate in an employer plan, but their spouse does. For joint return filers, the phaseout begins at $198,000 with full phase out at $208,000. For a married person filing separately, there is no cost of living adjustment.
If the taxpayer and spouse don’t participate in an employer retirement plan, there is no phase out.
5. Changes planned for the alternative minimum tax
The AMT was designed by Congress to keep wealthy taxpayers from using loopholes and many other credits and deductions so they could avoid paying taxes.
Prior to 2013, the AMT exemptions didn’t have an automatic update built in to account for inflation. As a result, a lot of middle income taxpayers were caught in that trap. The exemptions now are automatically adjusted for inflation, and many taxpayers now can avoid that tax. If you’re filing your own tax return with us, we watch for this automatically.
The 2021 exemption amount increased to $73,600 and will be phased out at $523,600 for single filers. A married couple filing a joint return will have a phase out starting at $114,600 and ending at $1,047,200.
6. Retirement plan distribution changes
The Cares Act that was effective January 1, 2018 had provisions for the tax year 2020, that permitted taxpayers that were impacted by Covid-19, to take distributions from a retirement account up to $100,000 without the 10% early distribution penalty.
In addition to that, the new Act relaxed the requirements for retired taxpayers that had to take the required minimum distribution (RMD). It should be noted that both of these provisions expired on December 31, 2020. If Congress doesn’t extend them in 2021, they will be gone when returns are filed for the 2021 tax year.
7. Expired Cares Act provisions at the end of 2020
The Cares Act was designed to provide much needed financial relief, but only for a short period of time. However, some of the major provisions expired at the end of 2020.
Many millions of American workers lost their jobs because of the effects of Covid-19 on the economy, and this legislation provided assistance for them. One of the provisions was a weekly payment of $600 to unemployed workers, and two more programs were established.
The Pandemic Unemployment Assistance (PUA) program provided funds for workers who would not have been eligible for unemployment benefits. Self employed workers that included freelancers and gig workers, were the recipients.
The second program was called the Pandemic Emergency Unemployment Compensation (PEUC), and it provided an extension from 26 to 39 weeks for any traditional state program.
There were a few other programs that were a part of the Cares Act that have already expired. Others were extended by the Consolidated Appropriations Act. One of them pertains to student loan payments that are paid by an employer. These employees are able to avoid taxes on the payments to the end of 2021.
Also, employers that offer leave to employees under the Family and Medical Leave Act has been extended to 2025. This provision began with the Cares Act where it also banned evictions, a moratorium on student loan payments, and paid sick leave.
Begin 2021 tax planning now
We recommend you begin 2021 tax planning now. With all of the tax changes taking place this year, it may be a good opportunity for you to increase your retirement contributions and perhaps participate in a health savings account (HSA). You’ll be able to not only lower your tax bill now, but can save money for later years.
When you’re filing your own tax return with EZ Online Taxes, our simple interview questions will let us know what tax forms you need for a fast and smooth tax filing process. It doesn’t matter how complex your return is either, our flat rate fee of $25 is all it will cost you.