Tax Season 2021: What You Need to Know

2020 has been quite the year, and like us, you probably never want to think about 2020 again. 2020 will always linger like a ghost but there is one lingering item you need to get rid of to help you move on for good. That's your 2020 taxes.

Thanks to COVID-19, many things have changed for the 2021 tax season. The sooner you start thinking about your tax situation, the better off you'll be. We want you to be prepared to take on your taxes! To do that, we're going to talk about what's new this tax season and what will remain the same.

Here are the main things you need to know for this 2021 Tax Season:

    Tax Day is Monday, May 17, 2021. You must file before this date!

    The standard deduction for 2020 increased to $12,400 for single filers and $24,800 for married couples filing jointly.

    Income tax brackets increased in 2020 to account for inflation

That's just the surface of what taxes are this year! Let's break down the details so you can be worry-free filing your taxes this year!

Income Brackets and Rates for 2021 Tax Season

Here's a refresher on how the different income brackets and tax rates work.

Your Tax Rate (the percentages of your income that you pay in taxes) is based on what Tax Bracket (income range) you're in.

For example, if you’re single and your income is $75,000, then you’re in the 22% tax bracket. But that doesn’t mean your tax rate is a flat 22%. Instead, part of your income is taxed at 10%, another part at 12%, and the last part at 22%. (You can check out the chart below to see all the tax brackets with their corresponding tax rate.)

For the 2020 tax year, the rates are the same! There are some slight changes to the brackets though. 

2020 Marginal Income Tax Rates and Brackets

Higher Standard Deductions in 2020

When you pay taxes, you have the option of taking the standard deduction or itemizing your deductions. If you itemize, you calculate each deduction one by one. This can take more time and be a hassle but could be worth it if your deductions exceed the amount of the standard deduction.

For the 2020 Tax Year, the standard deduction went up slighting to adjust for inflation.

Standard Deduction

Keep in mind every situation is different as far as if you should take the standard deduction or itemize each deduction out.

Tax Deductions and Credits to Consider for Tax Season 2021

The closest things to "Magic Word" when it comes to taxes are deductions and credits. Both help you keep more money in your pocket instead of Uncle Sam's, but they do so in slightly different ways!

Tax deductions help lower how much of your income is subject to federal income taxes. Some deductions are only available if you choose to itemize your deductions, while others are still available even if you decide to take the standard deduction. 

Meanwhile, tax credits lower your actual tax bill dollar for dollar, and there are two types of credits: refundable and nonrefundable. If a credit is greater than the amount you owe and it’s a refundable credit, the difference is paid to you as a refund. Score! But if it’s a nonrefundable credit, your tax bill will be reduced to zero, but you won’t get a refund. That’s still great!

Here are some deductions and credits you might be able to claim on your 2020 tax return:

Charitable Deductions

If you like to give like no one else, we have some great news! To encourage more charitable giving, the CARES Act allows you to deduct up to 100% of their adjusted gross income (AGI), which is your total income minus other deductions you have already taken, in qualified charitable donations if you plan to itemize their deductions.3

What if you’re taking the standard deduction? Well, the CARES Act added a new “above-the-line” deduction that will help you write off up to $300 of charitable contributions you made in cash.4  

Medical Deductions 

If you spent a lot of time in the hospital or found yourself with some hefty medical bills last year, you might be able to find at least some tax relief.

You can deduct any medical expenses above 7.5% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken.5 For example, if your AGI was $100,000, you can deduct out-of-pocket medical expenses above $7,500 in 2020. But you have to itemize your deductions to write off those expenses on your tax return. 

Business Deductions

If you’re self-employed, there are a bunch of deductions you can claim on your tax return—including travel expenses and the home office deduction if you use a part of your home to conduct business.6

But if you’re one of the millions of workers who were sent home to work remotely, you won’t be able to claim the home office deduction since it’s reserved for self-employed individuals only. Sorry!

Earned Income Tax Credit

The EITC is a refundable credit designed to help out low- and middle-income workers (workers earning up to $56,844 during the 2020 tax year might be eligible).7 Depending on your income, your filing status, and how many children you have, the credit could save you anywhere from a few hundred to a few thousand dollars on your taxes. But here’s a crazy stat: About one out of five taxpayers who are eligible either don’t claim the benefit on their taxes or don’t file a tax return at all.8 Don’t let that be you!

Child Tax Credit

Got kids? Families can claim up to $2,000 per qualified child with this tax credit (the income limits for this credit are $200,000 for single parents and $400,000 for married couples). And since this is a refundable credit, your family can receive up to $1,400 per child as a refund.9

And there are plenty of other deductions and credits that might be up for grabs depending on your situation! If you don’t want to miss out on any tax savings, you’ll want to work with a tax advisor who can make sure you’re not leaving any deductions or credits on the table.

Retirment Plans: 401(k)s, IRAs and More

There were a lot of changes to retirement plans in 2020—and some of those changes could impact your tax bill this year. Let’s tackle each of those major changes:

The CARES Act allows folks under age 59 1/2 to take up to $100,000 out of their 401(k)s and IRAs up until the end of 2020 without having to pay an early withdrawal penalty.16 But first, taking money out of your retirement accounts before retirement is a terrible idea—penalty or not. Second, the money you take out of tax-deferred retirement accounts like a traditional 401(k) or IRA will be taxed as ordinary income, so get ready to pay taxes on any withdrawals you make. 

If you own a traditional IRA, you have to take money out of your account once you reach a certain age. Those withdrawals are called required minimum distributions (RMDs). The good news is the SECURE Act pushed back the age for RMDs from traditional IRAs from 70 1/2 to 72 (if your 70th birthday was July 1, 2019, or later).17 On top of that, the CARES Act allows seniors to skip RMDs altogether in 2020 without penalty. That’s huge because it could lead to significant tax savings for retirees with those accounts since the money that’s taken out of a traditional IRA counts as taxable income.

The SECURE Act also allows owners of traditional IRAs to keep putting money in their accounts past age 70 1/2 starting in 2020.18 Since the money you put into a traditional IRA is tax-deductible, you could lower how much of your income is taxed this year. Just remember: You will have to pay taxes on that money whenever you take it out.

One last thing: If you did take some money out of a 401(k) or traditional IRA and you’re facing a huge tax bill, don’t panic! You have three years to put those funds back and get a refund on any taxes you paid on that money.19 And more importantly, it’ll help you get your retirement savings back on track.

If you have questions about your taxes, it’s a good idea to reach out to an investment professional who can walk you through the process of filing!

Happy Tax Season!