Tax Changes for 2021

New tax updates are here for 2021 tax filings. Let’s take a look at what’s changed for 2021 and find out how it affects you.

Recent tax updates may impact your personal income tax return this year, and that could mean a significant change in what you were expecting, from prior years. Check out some of the changes to the 2021 tax season below. Please note, however, that this is not a comprehensive list of all changes made affecting 2021 tax filing, but it is hopefully a great starting point!

Tax brackets have changed

As a result of inflation, income tax brackets have been adjusted. Your income tax bracket is determined based on your taxable income and filing status. Your taxable income includes the amount you earn prior to taxes being withheld as well as interest, dividends, and other taxable income, and is reduced by certain allowable deductions (including your itemized deductions or the standard deduction).

Expanded credits for families

Leading the new tax law updates for 2021 are the following credit items:

Recovery Rebate Credit: The Internal Revenue Service (IRS) issued first, second, and third Economic Impact Payments and most individuals received their stimulus checks in 2020 and early 2021. However, anyone who missed a payment, or who received less than the full amount, might be eligible to claim a Recovery Rebate Credit.

Child Tax Credit: The American Rescue Plan Act of 2021 (“ARPA”) increased the amount of the Child Tax Credit (CTC), made it refundable for most taxpayers, and made it possible for eligible households to receive half of such amount as an advance, in monthly payments. The amount was increased to $3,000 for each qualified dependent aged 6-17 and $3,600 for each qualified dependent aged 5 and under. However, taxpayers who did not qualify for the CTC, but who may have received an advance payment, may have to repay it.

Credit for Child and Dependent Care Expenses: In addition to increasing the amount of credit and eligible expenses for child and dependent care, ARPA also increased the amount of adjusted gross income for the phase-out of the credit and made the credit fully refundable for certain taxpayers.

Earned income tax credit

If you are childless and your income is low to moderate, you may qualify for a credit to reduce your taxes and maybe even increase your refund. The amount of the credit may vary depending on whether you have dependents, are disabled, or meet other designated criteria.

Students under age 24 won’t qualify for the credit but younger workers (aged 19 or older) may be eligible as well as senior citizens since there is no maximum age limit for the credit in 2021. The earned income tax credit has increased with these new tax changes but keep in mind some of these changes may only apply to the 2021 tax year.

Charity deduction for standard deduction filers

It is estimated that almost 9 out of 10 taxpayers take the standard deduction instead of itemizing their deductions on their personal income tax returns. However, a temporary new law now allows taxpayers who take the standard deduction to also claim a deduction for up to $300 in cash donations to qualifying charities, or $600 for married couples filing jointly. Special recordkeeping rules apply here.

Unemployment compensation is taxable in 2021

In 2020, up to $10,200 of unemployment benefits was not taxable for most households. This exclusion is no longer available. In 2021, any unemployment compensation received is now taxable for federal income tax purposes and is reportable on Form 1040, Schedule 1 Line 7.   The state taxation of unemployment compensation varies by state.

No taxes are owed on forgiven student loans

Before 2021, forgiven student loans were generally taxable. If in 2021 (and through 2025), you were able to get some of all of your student loans forgiven, you’re no longer subject to federal income taxes on the forgiven amount. The tax treatment for forgiven student loans may vary for state income tax purposes.

We can help

The team at Decimal is made of experienced accountants, well-versed in the new tax laws and updates for the 2021 tax season. Not only will their dedicated teams provide managed, online bookkeeping with real-time support for all tax changes this year, but their specially configured software helps to ensure that your 2021 income tax return will be compliant, on-time, and includes maximum allowable credits and refunds for your unique situation.  You don’t have to tackle the new 2021 income tax laws on your own. Contact Decimal and visit with an accounting specialist dedicated to your small business success.

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