Tax Changes to be Aware of in 2021
2020 was a year many of us would prefer to forget, for obvious reasons. Unfortunately, until you handle last year’s taxes, you won’t be able to close the book on 2020 just yet. The good news? There are new tax deductions and credits available for this tax year to help reduce the amount you owe on your taxes. On the downside, some deductions have expired and there are also a few rules you should be aware of, particularly if you lost your job in 2021 and collected unemployment.
I’ll walk you through all of the tax law changes you need to know regarding updated federal income tax brackets, tax deductions and credits, and what you need to understand if you were unemployed or received a stimulus check.
- Important tax changes for 2021
- How to claim tax deductions
-
- When will the IRS start accepting tax returns for 2020?
- Can I still claim tax exemptions in 2020?
- Will the stimulus check impact my taxes?
- Will tax refunds be delayed in 2021?
- When are my 2020 taxes due?
- What is the capital gains tax for 2020?
- What are the AMT exemption rates for 2020?
- How much social security income is taxable in 2020?
- The bottom line
Important tax changes for 2021
There were many changes made in 2020 as part of the coronavirus relief act and tax reform (CARES Act) to help during the pandemic. One change everyone should be aware of is higher income tax brackets. Income tax brackets tend to rise annually to account for inflation adjustments. For the 2020 filing year, the income tax brackets are:
| Single Tax Rate | Single | Married Tax Rate | Married, Filing Jointly |
|---|---|---|---|
| 10% | $9,875 or less | 10% | $19,750 or less |
| 12% | $9,876 - $40,125 | $1,975 + 12% of income over $19,751 | $19,751 - $80,250 |
| 22% | $40,126 - $85,525 | $9,235 + 22% of income over $80,250 | $80,251 - $171,050 |
| 24% | $85,526 - $163,300 | $29,211 + 24% of income over 171,050 | $171,051 - $326,600 |
| 32% | $163,301 - $207,350 | $66,543 + 32% of income over $326,600 | $326,601 - $414,700 |
| 35% | $207,351 - $518,400 | $94,735 + 35% of income over $414,700 | $414,701 - $622,050 |
| 37% | $518,401+ | $167,307.50 + 37% of income over $622,050 | $622,051+ |
You can view the complete IRS income tax schedule for other filing statuses (such as heads of household) here.
Top changes in deductions and credits for 2020
What are tax deductions?
Tax deductions can help you save money on your taxes. They work by lowering your taxable income, which, in turn, reduces your tax bill. If you qualify for a tax deduction, you’ll subtract the amount you’re eligible for from your income to lower your taxable income.
What are tax credits?
Tax credits are often confused with tax deductions. While both can save you money on your taxes, tax credits instead deduct dollars from your tax bill. Some are refundable, which means if you owe on your taxes and a credit puts you in the positive, you’ll actually receive a check back from the government.
For example, if you qualify for a $500 tax credit that is refundable and currently owe $200, you’d receive a $300 check. If the credit you qualify for is not refundable, you’d simply zero out your tax bill.
Tax credits often lower your tax bills more than tax deductions.
Types of tax deductions to be aware of when filing 2020 taxes
Now that you understand what tax deductions are and the difference between tax credits, it’s time to see if there are any new deductions you might qualify for. Below are the updated tax deductions you should be aware of when filing last year’s taxes.
Home office deduction
If you worked in a home office this year, you might have heard that there’s a home office deduction. And while this is true, if you were not self-employed, you won’t qualify for this tax break. In order to qualify, you must use your home office space for your own business, it must be the principal place of business, and you must not use this space for any other reason (i.e. you can’t deduct for the kitchen table as a workspace during the day).
If you are self-employed and meet these qualifications, you can opt for a simplified or standard deduction. The simplified method allows you to deduct $5 per square foot of your home, up to 300 square feet. So a 60 square foot office would offer you a $120 deduction.
The standard method requires you to track the cost of owning and maintaining your home (rent, electric, gas, repairs, taxes, etc) for the year and multiplying this number by the percentage of square footage your office space takes up.
For instance, if your office is 60 square feet and your home is 1,200 square feet, it would equal 5% of your home’s square footage. If your yearly expenses for your home equaled $16,000, you’d multiply this by 0.05 to get $80 as your deduction amount.
Typically, the smaller your office, the more likely you are to get more money from the standard deduction.
Medical deductions
If you had coronavirus or another illness that left you with hefty medical bills in 2020, there’s a new medical deduction that resulted from the CARES Act to offer some additional tax relief. This tax break allows individuals to deduct medical expenses over 7.5% of their adjusted gross income (AGI) if you itemize their deductions.
Let’s say you made $65,000 in 2020 and have $6,000 in medical bills and expenses. You’ll be able to figure out what you can deduct using the below formula:
$65,000 x 7.5% = $4,875
$6,000 - $4,875 = $1,125
You could deduct $1,125 using this tax break.
Charitable donation deductions
Supporting communities and those in need was particularly important in 2020, which is one of the reasons why the CARES act updated charitable contributions deductions. If you donated to charity last year, you’re allowed to deduct up to 100% of your AGI for charitable donations. So, if you donated $5,000 last year and earn over this amount annually, you can deduct the full amount from your income.
Corporations can deduct up to 25% of their taxable income. Any amount over this percentage can be rolled over to the next year.
Student loan interest deduction
Student loans were deferred for many halfway through the year thanks to the pandemic. But if you paid any interest on student loans during 2020, you can deduct up to $2,500 from your taxable income with the student loan interest deduction.
Education deductions
In previous years, there was a tuition and fees deduction that allowed students to deduct up to $4,000 from their taxable income. Unfortunately, this student tuition deduction, which was originally set to expire in December of 2020 was repealed during the CARES Act. Instead, the Lifetime Learning Credit was expanded, offering up to $2,000 in credits for taxpayers making $80,000 or less (for single filers) or $160,000 or less (for joint filers).
In addition, the American Opportunity Tax Credit (AOTC) can grant students or their parents up to $2,500 per student. You’ll need to be enrolled at least half-time and not have claimed this credit or the Hope credit for more than four tax years to qualify.
Earned income tax credit
If you’re a low-to-moderate earner, you may also qualify for the Earned Income Tax Credit (EITC). Below are the income requirements and maximum EITC credit amounts you can claim for the 2021 tax year.
| Number of children (or claimed relatives) | Maximum AGI (must file as single, head of household or widowed) | Maximum AGI (must file as married or jointly) | Maximum EITC credit you can claim |
|---|---|---|---|
| 0 | $15,820 | $21,710 | $538 |
| 1 | $41,756 | $47,646 | $3,583 |
| 2 | $47,440 | $53,330 | $5,920 |
| 3+ | $50,594 | $56,844 | $6,660 |
Child tax credit
If you have kids or underage dependents, you can claim up to $2,000 per qualifying child via the Child Tax Credit. To qualify, you must make under $200,000 (single filers) and under $400,000 (if married filing jointly).
Additional business deductions
If you are self-employed or own your own business, there are many business deductions you can take advantage of, including:
- Capital expenses
- Costs of goods sold
- Travel
- Rent
- Insurance
- Employee salaries
- Retirement plans
- Interest charged
How to claim tax deductions
In order to claim tax deductions, you’ll first need to decide if you want to claim standard or itemized deductions. A standard deduction will deduct a flat-fee from your income according to your filing status and an itemized deduction allows you to claim any of the available deductions you qualify for.
Here are the 2020 standard deduction rates:
| Filing status | Standard deduction |
|---|---|
| Single | $12,400 |
| Married, filing jointly | $24,800 |
| Married, filing separately | $12,400 |
| Head of household | $18,650 |
Which deduction is better? That all depends on the number of expenses you have available to claim. While the standard deduction has increased over the years (particularly since the 2017 Tax Cuts and Jobs Act), if you think itemizing will get you more money, you’ll need to calculate your expenses, provide proof to certify you’re entitled to these deductions, and may need to fill out additional tax forms.
If you’re not sure which deduction is right for you, I recommend talking to an accountant or tax professional.
Other changes to be aware of for the 2020 tax season
While credits and deductions make up some of the most important changes for the 2020 tax season, there are a few more updates you should be aware of.
Individual stimulus checks
If you received a stimulus check in 2020, you will not owe taxes on this money, nor will it reduce your refund amount (if eligible).
Unemployment benefits
Since unemployment benefits included an additional $600 payment per week for a few months this year, many found themselves earning more than they had at their previous jobs. If this is the case for you, you might find yourself bumped up to a higher tax bracket, and will likely owe more in taxes or see a smaller refund.
PPP loans
Payment protection program (PPP) loans were extended to many small businesses in 2020 to help them continue to pay employees. As clarified in one of the tax provisions passed at the end of December 2020, PPP loan amounts won’t be included in a business’s taxable income. As a result, any expenses you paid for using this money are also not deductible.
RMDs
Last year, required minimum distributions (RMDs) were waived for retirees. This means if you took out less from your retirement accounts than would have been required, you’ll likely have a lower taxable income when filing in 2021.
Estate tax increases
In 2020, estate tax exemptions were increased to $11.58 million per individual and $23.16 million per couple.
FAQs
When will the IRS start accepting tax returns for 2020?
The IRS will start accepting tax returns towards the end of January. As of the date of this writing, an official date has not yet been released.
Can I still claim tax exemptions in 2020?
No, personal tax exemptions were eliminated in 2017 as part of the Tax Cuts and Jobs Act.
Will the stimulus check impact my taxes?
No, you will not owe this money back or have it deducted from your refund.
Will tax refunds be delayed in 2021?
The IRS has not reported that we should expect a delay for 2021 tax returns.
When are my 2020 taxes due?
The due date for 2020 taxes is currently April 15th, 2020, unless you file for a tax extension.
What is the capital gains tax for 2020?
Long-term 2020 capital gains taxes are as follows:
- 0% - income under $53,601
- 15% - income between $53,601 and $469,050
- 20% - income over $469,051
Any short-term capital gains will be taxed as regular income, based on your income tax bracket.
What are the AMT exemption rates for 2020?
The alternative minimum tax rates for 2020 are 26% and 28%
How much social security income is taxable in 2020?
Single filers with an income between $25,000 - $34,000 will pay taxes on up to 50% of their Social Security income. If your income is higher than $34,000, you’ll pay taxes on up to 85% of your Social Security benefits..
The bottom line
2020 was a chaotic year for everyone, and if you’re hoping to move forward as quickly as possible, I recommend filing your taxes sooner rather than later. Use this guide to keep you aware of tax changes and new deductions and credits that might offer you a break on your taxes.