What to Know When Filing Your 2021 Taxes
Here are the six biggest ways new tax laws for 2021 will impact you as you file your 2021 taxes this year.
1. Change in 2021 tax brackets.
This year, the tax brackets have changed to account for inflation. It’s important to know that the rates themselves didn’t change, just the brackets. There are seven income brackets, and the tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The income allowances within each bracket have been updated to allow for inflation. Check with the IRS to see which 2021 tax bracket you fall into, and to plan for your 2022 tax year.
2. Traditional or Roth IRA contributions deadline.
If you haven’t contributed to your traditional or Roth IRA for 2021 yet, you have until April 15th to do so. This is a special provision that allows for contribution for the previous calendar year until the tax filing deadline. It’s also important to note this date because it's always Tax Day (unless it falls on a weekend or holiday). This year, Tax Day has been moved to Monday, April 18th, but note that the three-day extension does not apply to IRA contributions.
3. Student loan changes.
In previous years, if your student loans were canceled, forgiven, or deferred, the IRS still considered the forgiven debt a taxable income. This is no longer the case, thanks to the COVID relief bill. This tax relief is expected to continue until 2025.
4. Child tax credit changes.
In 2020, taxpayers with dependents could claim a tax credit of $2,000 for every child 16 and younger. This credit was partially refundable, which meant that you could earn back up to $1,400 per child if you had an income of at least $2,500. For 2021 taxes, the credit has been increased to $3,000 for every child 17 and under and $3600 for children five and under. There is no earned income requirement.
5. Higher medical expense deductions.
Health insurance is getting less and less affordable and oftentimes, insurance companies don’t reimburse your out-of-pocket expenses. When you file your 2021 taxes, you can deduct a percentage of unreimbursed medical expenses. The percentage of your income that you can claim for last year’s tax filing is 7.5% of your total income. To receive this deduction when you file, you'll need to do an itemized deduction instead of a standardized one.
6. Higher standard deductions.
Everyone has the option to either take a standardized deduction or an itemized deduction. For the 2021 tax year, the deduction has increased to $12,550 for single filers and married couples filing separately and $18,800 for heads of households — both $150 more than in 2020. For married couples who file jointly, the standard deduction is now $25,100, up $300 from 2020. While standard deductions have increased, it’s important to remember that when you take one, you miss out on other deductions, such as medical expense reimbursement, both of which require itemized deductions.
As you prepare for the 2021 tax season and get ready to file your 2021 taxes, remember the new tax laws for 2021. The change in brackets, changes in deductions, IRA deadlines, student loan forgiveness changes, and child tax credits are important things to know to make filing your taxes as smooth as possible.