Preparing for taxes in 2021
Due to the COVID-19 pandemic, Tax Day was pushed back to July 15th, resulting in a shortened tax season. Whether you met the July 15th deadline for filing and paying your 2019 taxes or requested an extension, now is the time to start thinking about the 2021 tax season because the date for filing returns and submitting payments will be April 15th, 2021.
There will be tax changes for 2021, so the sooner you become educated about the credits, deductions, and contribution limits that will be available to you, the more time you’ll have to take advantage of them.
The CARES Act waived required minimum distributions (RMDs) from retirement accounts for 2020. RMDs generally count as taxable income, therefore, this one-time reprieve means that some retirees will have lower taxable incomes in 2020. The result? There is a possibility that you could owe less in federal income taxes in 2021.
What to expect
Other ways in which the federal tax return that you’ll file in 2021 is going to differ from last year’s return include:
- Higher HSA limits
- Changes in charitable deductions
- Adoption credit changes
- New amounts for standard deductions
- Increased contribution limits for limited workplace retirement accounts
- Higher limits for the Saver’s Credit
- Increase in both the income limits and maximum credit amounts for the Earned Income Tax Credit
In addition, there will be higher income brackets for 2021 due, once again, to inflation. The tax rates did not change for your 2020 tax return, but the tax brackets amounts were adjusted to account for inflation.
Unfortunately, there will be a higher cap on Social Security payroll taxes. The maximum amount of an employee’s income that is subject to Social Security payroll taxes increased from $132,900 in 2019 to $137,000 for 2020.
What you need to know
There will be a few other changes to the 1040 form for your 2021 taxes of which you need to be aware. In the past, when you reported the amount of federal tax withheld, you reported one number — the paid federal income tax shown on your W-2 and on any 1099 that you received. This year, the numbers are being reported on separate lines.
And it looks like Line 30 will be reserved for something that the federal government is calling a “recovery rebate credit” which refers to the stimulus payments that you received. You may end up receiving an additional tax credit if your 2020 tax return has a smaller AGI than the one that was used to calculate the initial stimulus check or if you have additional dependents.
At GYL, we provide personal tax accounting services, offering our clients highly accurate, accountable, and proactive tax planning and preparation. Our tax professionals will work with you to help guide through all of the tax changes for 2021.