Tax Day 2022 in the United States is just weeks away and this year falls on April 18th - a few days later than normal due to Emancipation Day in Washington, D.C. The IRS began accepting income tax returns for 2021 in late January so if you tend to be more proactive, it's entirely possible you've already filed your taxes. On the other hand, if you are just beginning to review and process your 2021 tax return, you may be wondering how the various new tax rules that went into effect earlier this year will impact your return.
The good news is that most of the changes are modest, but that doesn't mean you shouldn't familiarize yourself with the new tax rules so you can take advantage of them on this year’s tax return. Here are a few key things that you'll definitely want to keep in mind when you file your taxes for 2021.
First Things First
First, the basics. Your tax bracket is determined by your taxable income and your current filing status. Your filing status can change depending on age and marital status. If you're married, it will be impacted by whether you're filing individually, jointly, as a qualifying widow or widower or as head of household. There are currently seven brackets and which one you fall into is determined by your taxable income and filing status. The brackets for 2021 are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Overall, the biggest change for this year is that the IRS increased the income threshold for all federal tax brackets to take inflation into consideration and has raised standard deductions as well - a welcome adjustment, for sure. The income tax bracket determines the tax amount you will pay based on your adjusted gross income. Visit the IRS website to learn more about the adjusted thresholds.
The standard deduction amount is being raised to $12,950 for individuals and married couples filing separately, and $19,400 for anyone considered to be the head of a household. For married couples filing jointly - along with the surviving spouses of someone who has passed away - the total is being raised to $25,900.
Other Key Changes for 2021
There are six other key changes going that you may need to consider when filing your tax return. These include the following:
- The temporary provision of the CARES Act expanded the deduction per tax return for charitable giving to up to $300 per person, even for taxpayers choosing the standard deduction.
- The earned income tax credit has been increased for low and moderate-income workers.
- The child tax credit is a benefit that allows working families to claim a credit per a qualifying child. The American Rescue Plan increased the amount that can be claimed in 2021 to $3,600 per child under age 6 and $3,000 for children age 6 to 16.
- Required Minimum Distributions (RMDs) were reinstated for 2021. RMDs were waived in 2020 as part of the CARES Act, but taxpayers 72 and older should have taken a RMD from their IRA or retirement accounts last year. These required withdrawals are taxable income and need to be reported on your tax return.
- Student loan forgiven in 2021 are not subject to taxation. And this new law is in place through 2025.
- Unemployment benefits received in 2021 are fully taxable. The temporary tax break issued under the American Rescue Plan in 2020 is no longer available.
The overall impact of these tax changes will vary wildly depending on your individual situation. Some taxpayers may only be faced with minimal modifications to file their return, but others could experience significant changes that require the assistance of a qualified tax professional. Either way, it's always recommended to have a solid financial plan in place so that you can be prepared when changes like these occur. Tax codes tend to change on a regular basis and being proactive is the best way to avoid potential surprises down the road and maximize opportunities that work in your favor for financial success.