Important Tax Changes You Need to Know About For 2021

2021 Tax Year Changes

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Spring signals many things. It might mean (re)committing to those New Year’s resolutions, enjoying the warming weather and signs of new beginnings in nature, or some much-needed spring cleaning. Spring is always a season represented by the classic saying “out with the old, in with the new.” And then, of course, there’s the much-dreaded tax season. It’s unavoidable.

This year, taxes are going to look a little different. More specifically, we’re talking about you 2020 taxes, which are still due on April 15th. [Update: this was extended to May 17.] The coronavirus might have delayed or cancelled quite a few things, but taxes aren’t one of them. So what does the tax landscape look like for a year that can really only be described by four-letter words? Keep reading to find out more.

In this guide, we’ll update you on what changes you can expect for 2020’s taxes, how those changes will affect your personal return, and where you can turn for help. We can’t guarantee you’ll get a refund, but at least taxes only come once a year. After you get through this tax season, you’ll get a whole year to recover. For many of us, it’s much-needed.

Reasons for 2020 Tax Changes

There’s no denying 2020 was a year for the history books. But when it comes to taxes, there are a few quantifiable reasons why your taxes will look much different this year. Can you guess a few? Here are some of the most impactful factors.

Employment and Unemployment Status

The first and most obvious reason is that these “changes come mainly as a response to the coronavirus pandemic.” COVID-19 affected millions, specifically in terms of employment. Many people faced the reality of losing their jobs. Even if they did retain their position, lots of you probably worked less hours or have to switch to an at-home office. For those unfortunate enough to lose their jobs, unemployment benefits acted as a lifesaver.

Now, unemployment has been around long before the coronavirus. Those familiar with the 1099-G form will know that these benefits are still taxable because they are considered income. That’s why you’ll need to “detail how much you got and how much was withheld for tax purposes” on that 1099-G form. Obviously, more people than ever will be filing this form, due to nationwide draw on unemployment benefits that the pandemic caused.

The federal government recently passed the American Rescue Plan Act of 2021. It allows the first $10,200 of your unemployment benefits to avoid taxation. The IRS signaled that many filers who plan to claim unemployment assistance on their tax returns should delay filing until their systems can handle this new change. They also want to avoid you having to file an amended return if you wrongly included all of your unemployment earnings in your taxable income. This also counts double if you file as a married couple and both of you had unemployment earnings. You can both receive up to $20,400 of tax-free unemployment earnings, for tax year 2020 only.

Stimulus Checks and Retirement Funds

Another factor affecting 2020 taxes are the two rounds of stimulus checks sent out. There is also a third set of stimulus checks coming out as part of the American Rescue Plan Act of 2021. However, that will affect your 2021 tax return when you file in 2022. Stimulus checks are not considered income. They should really be seen as an advanced refund, more than anything. However, if you did draw from your retirement accounts to boost your cashflow beyond what the stimulus checks were able to do, “you will still have it taxed as income.” Luckily, you have three years to pay off that tax. However, you should still be aware it exists.

Businesses and PPP Loans

Finally, many businesses took advantage of the Paycheck Protection Program (PPP) in 2020. These loans allowed them to retain employees during the pandemic, but will need to be recognized on your tax forms. If you want to learn more about tax changes for businesses, check out Avalara’s comprehensive 2021 sales tax report.

Specific 2020 Tax Changes and Their Implications

It’s all well and good to know why things are changing for the 2020 tax year, but how do those changes impact you specifically? Here are a few ways you can expect to see those changes manifested in your tax returns.

Higher Standard Deductions

The standard deduction you can take advantage of has increased anywhere from $100 to $400. For 2020’s taxes, the standard deduction for singles is up to $12,400.Married couples filing jointly have a $24,800 standard deduction. Heads of household have an $18,650 standard deduction. If you file as someone aged 65 or older, you can also take advantage of an additional standard deduction. Depending on your filing status and if your spouse is also age 65 or older during the tax year, the amount of added standard deduction you can claim will vary.

Income Tax Brackets Expand

Your annual income places you in a specific tax bracket. These brackets are adjusted for inflation every year, so they have changed slightly. For 2020, the tax brackets increased anywhere from $3,000 to $5,000, depending on your filing status.

Flexible Spending Accounts Roll Over

Also known as FSAs, these flexible spending accounts can be rolled over to 2021 and/or 2022. The Health Savings Account (HSA) contribution limits also increased.

Charitable Deductions Increase

If you were able to donate to a cause in 2020, we’re sure that your generosity was appreciated. A part of the CARES Act will enable you to deduce up to $300 in cash donations for 2020. You can deduct this even if you already took the standard deduction too.

In 2021, you may deduct up to $300 per person (meaning $600 if you file jointly as a married couple) in cash charitable contributions you made during 2021. These charitable deductions add on top of your standard deduction and do not require you to itemize your deductions to claim this added deduction. For example, if you claim the full $24,800 standard deduction as a married couple, you may also claim an additional $300 to total to $25,100 for your deductions in 2020.

Medical Expenses Above 7.5%

You can deduct any medical expenses above 7.5% of your adjusted gross income. (That’s your total income minus other deductions you might have already taken.) However, you do have to itemize your expenses if you want to take advantage of this specific medical deduction. It can be tedious, but worth it, if you incurred major medical expenses.

How You Can Prepare for Your 2020 Taxes

Tax season might seem scarier this year for many people — at least more so than in the past. After all, with so many changes that might have happened in your life, how do you account for it all?

The first step is making sure you understand taxes are still due by April 15 May 17, 2021. You do have the option to file for an extension, giving you until October 15, 2021. However, make sure you prepare and file the necessary paperwork if that’s the case.

If you haven’t gotten started on your taxes yet, that’s okay. The Internal Revenue Service (IRS) didn’t start reviewing and processing returns until February 12, 2021. The IRS does recommend “that the fastest and safest way to receive a refund is to combine direct deposit with electronic filing.” The agency does what it can to reduce identity theft and fraud, so some returns may take longer to process.

We also caution you to be patient with your local tax professionals as well. They also have to adapt to changes on both a state and federal level. It’s best to plan ahead and get them your paperwork early to ensure your returns are filed on time. While you may not be able to meet with them in person right now, take advantage of other methods of communication to expedite the process.

Some Things Never Change — Like Taxes

While 2020 was a whirlwind year that took most of us by surprise, you can still count on taxes. For some lucky folks, that means much-needed refunds. Even if you don’t get a refund, know that there are options out there when it comes to setting up payment plans or working to get your taxes paid without penalty.

Stay informed about your tax situation and reach out to experts if you have any questions. There are plenty of helpful guides online, so take advantage of that time at home to educate yourself. You might learn something new about taxes that could help you in years to come.

2021 Tax Year Changes

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Riley Adams, CPA

Riley Adams, CPA

Riley is a San Francisco-based senior financial analyst and CPA at Google who also runs the personal finance site, Young and the Invested. He and his wife have one child together and all three enjoy exploring the outdoors of Northern California. Previously, he worked for a public utility in New Orleans for six years after graduating from Penn State University with his M.S. in Applied Economics and Demography.

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