The new year brings with it some tax changes from the IRS, but far fewer than we saw with the Tax Cuts and Jobs Act of 2017, say tax advisors.
From higher education credits to contribution limits and income caps for retirement accounts, and exemptions from gift and estate taxes, there are some subtle differences in the tax code that could affect your return for 2021.
Taking the standard deduction will give most taxpayers a lower taxable income. It’s not only easier, the amounts are higher now, for most filers making it the better choice, according to financial experts.
For those filing as a single taxpayer or married filing separately, the standard deduction is up $150, to $12,550. If you’re married and filing jointly, your deduction will be $25,100 in 2021. Those with a head of household status, will have a $18,800 standard deduction.
There are also additional deductions for those who are 65 or older or blind. They will get to add $1700, if single, and $1350, for those who are married. If you are 65 or older and blind, the standard deduction will double the applicable amount. It’s important to note too, that for joint filers, each spouse is entitled to those deductions.
For minor children who have to file an income tax return, the standard deduction of $1,000 will be the same this year. However, if a teen earns more than $750 in wages, the standard deduction equals their total earned income plus $350, up to the standard deduction for a single person.
As always, there are tax credits, including the earned income tax credit, the child tax credit, the saver’s credit and educational tax credits. The popular earned income tax credit allows significant reductions for low and middle-income earners. The size of the credit will depend on income and family size. The income caps are up a small amount over 2020.
It is important to note that even if you owe no taxes, you may be entitled to the earned income credit in the form of a refund, according to the IRS.
The saver’s tax credit pays as much as $1000 per person to those low and middle-income earners who put money into a retirement account, tax advisors note. Depending on your income, you could get a credit for 10 percent, 20 percent or 50 percent of up to $2000 in contributions to a retirement account.
Ask your tax advisor or financial planner about educational tax credits to see if you may qualify. The Lifetime Learning tax credit offers educational tax breaks for graduate school, vocational training and some other nontraditional educational expenses. In 2021, joint filers will see an increase in qualifying income thresholds.
And don’t forget your retirement tax planning for 2021. It can be the best way to control your tax burden as it offers deductions and tax deferrals while your money continues to grow in your retirement accounts.
There are several changes of note for individuals of retirement age. For the coming year, seniors will see a Social Security cost-of-living increase of 1.3%. In addition, the Social Security wage cap is increasing to $142,800, meaning that Social Security taxes must be paid on up to $142,800 in earnings, instead of last year’s cap of $137,700. There will also be an increase in the earnings test limit for seniors. This refers to the threshold for additional income a person collecting Social Security benefits can earn, without having some of their benefits withheld. The earnings test limit can vary from year to year.
Please contact a tax advisor at Diamond & Associates CPAs if you have any questions or concerns about your tax obligations for 2021. We are always happy to help!