2020 is in the books — good riddance, right? But though the year has passed, one element still lingers: your 2020 taxes. Once you've prepared and filed them, you can close the book on 2020 for good.
Because of the coronavirus pandemic, Tax Day 2021 — which, as of this writing, is April 15 — looks a little different, especially for the newly retired and existing retirees. Among other changes meant to help Americans, the U.S. government passed several rounds of stimulus for individuals and small businesses. You might feel some tax implications from them, and you need to comprehend all the new considerations before you file.
Here's your Tax Day 2021 checklist.
Tax Changes to Know for Tax Day 2021
Your tax situation probably changes every year. Sometimes, the changes are minor; maybe inflation bumps you to a different tax bracket or changes how much you can take for the standard deduction. Sometimes, though, they're major, like if the government issues stimulus checks or offers Paycheck Protection Program (PPP) loans.
Here are some changes you might see during the upcoming tax season.
Adjusted Income Brackets
The IRS places you into one of seven tax brackets based on your taxable income. Each bracket is taxed at a different rate, and, under the United States' progressive tax system, the income tax rate increases as income increases.
For the 2020 tax year (i.e., the tax return you file in 2021), the IRS adjusted the tax brackets to account for inflation. If your adjusted gross income stayed flat year over year, you could wind up in a different bracket. But the tax rates remain the same.
- 37% for single filers with incomes over $518,400, or $622,050 for married couples filing jointly.
- 35% for single filers with incomes over $207,350, or $414,700 for married couples filing jointly.
- 32% for single filers with incomes over $163,300, or $326,600 for married couples filing jointly.
- 24% for single filers with incomes over $85,525, or $171,050 for married couples filing jointly.
- 22% for single filers with incomes over $40,125, or $80,250 for married couples filing jointly.
- 12% for single filers with incomes over $9,875, or $19,750 for married couples filing jointly.
- 10% for single filers with incomes less than $9,875, or $19,750 for married couples filing jointly.
For example, if you and your spouse had an adjusted gross income of $100,000 and filed jointly, you would be placed in the 22% tax bracket. However, this doesn't mean that you'd pay 22% on all your income. You'd pay 10% on the first $19,750 (or $1,975, in this example), 12% on the amount between $19,750 and $80,250 (or $7,260) and 22% on the rest.
Higher Standard Deduction
Note in the example above that we specified adjusted gross income. You're only taxed on your adjusted gross income, which is your gross income minus specific adjustments, such as contributions to retirement accounts and mortgage interest, that you itemize on your tax return. If you don't have any applicable adjustments, you can still claim a standard deduction, a specific dollar amount that reduces your taxable income.
Single filers and married couples filing separately can each claim a standard deduction of $12,400 on their 2020 return, which is up $200 from 2019. Married couples filing jointly can claim $24,800, up $400. Heads of households can claim $18,650, up $300. These changes account for inflation and reflect a higher cost of living.
You can either claim the standard deduction on your tax return, or you can itemize deductions. You can't do both. To figure out which approach is best for you, consult a tax professional.
Tax Deductions and Credits
When tax time comes around, deductions and credits can be your best friends.
Tax deductions lower your taxable income, meaning you're thus subject to less tax liability.
Tax credits lower your tax liability dollar for dollar. There are two types of credit: refundable and nonrefundable. For refundable credits, if the credit comes out to more than you owe in taxes, the IRS cuts you a check. Nonrefundable credits can only reduce your tax liability to $0, and you forfeit any unused amount.
Here are some deductions and credits you might qualify for.
- Charitable deductions. If you donated money and/or property to charity, claiming those donations could significantly reduce your taxable income. And the CARES Act has boosted the tax breaks for the 2020 tax year: You can deduct qualifying donations of up to 100% of your adjusted gross income (and if you contributed more than your adjusted gross income, you can carry the tax break over to next year). And while charitable contributions are usually only deductible if taxpayers itemize their deductions, people who take the standard deduction this year can claim up to $300 in charitable cash donations.
- Medical deductions. For the 2020 tax year, you can claim qualified medical expenses exceeding 7.5% of your adjusted gross income. For example, if your adjusted gross income was $100,000 and you accrued $10,000 in medical bills, you could write off anything beyond the first $7,500 — in this case, $2,500. You must itemize to claim the medical deduction.
- Business deductions. If you're self-employed, you might be able to claim a substantial amount of your business-related deductions on your return. If you worked remotely as an employee, though, you can't claim the home office deduction.
- Individual retirement accounts and 401(k) accounts. A significant number of changes happened for retirement plans in 2020.
- A provision in the CARES Act lets you withdraw up to $100,000 from your individual retirement account (IRA) or your 401(k) through the end of the year without incurring an early withdrawal penalty, if you meet certain qualifications. You still have to pay income tax on the withdrawals.
- The CARES Act also suspended required minimum distributions for 2020, and the SECURE Act increased the age for required minimum distributions from 70 1/2 to 72.
- The SECURE Act also removed the age limit for IRA contributions. If you're over 70 1/2, you can now contribute an extra $7,000 to your IRA.
COVID-19 and Your Taxes
The COVID-19 pandemic created a substantial amount of change for Tax Day 2021. Filers will need to understand how some of the economic relief given out affects their returns.
- Stimulus checks. The CARES Act provided stimulus checks of up to $1,200 to adults who earned less than $99,000 and up to $500 for each qualifying dependent. At the end of 2020, the federal government issued another round of stimulus checks, providing up to $600 to each qualifying adult and child. None of these payments count as taxable income.
- Paycheck Protection Program Loans. The CARES Act also provided relief through forgivable loans to small business owners. If you took a PPP loan, you'd need to apply for loan forgiveness and receive approval from the Small Business Administration. The IRS has also said that you can deduct any eligible expenses paid for with PPP money.
- Unemployment benefits. Many Americans lost their jobs in 2020 because of shelter-in-place orders and lockdowns. If you received unemployment, you'll need to pay income taxes on that money. If you asked the state you live in to withhold income taxes on your behalf, you won't see a tax bill.
Maximize Your Tax Results in 2021
Now that you know about many of the tax changes you can expect to see ahead of Tax Day 2021, you can begin your planning. Some first steps include:
- Considering whether to claim the standard deduction or if itemizing makes more sense.
- Taking advantage of traditional IRA contributions, if you haven't already.
- Tracking down any paperwork on your business-related expenses.
If your tax situation is complicated, you don't have to sort it out alone. Find a tax professional in your area who can help you prepare your return. If you're set on handling your taxes by yourself, look into tax software packages, which help with the heavy lifting.
Whatever you choose, start the filing process early. The earlier you start, the less stress you'll have — and the more you can enjoy a secure and fulfilling retirement.