Understanding tax laws and the way they change means being well prepared for every upcoming tax season. As a top-rated CPA in Colorado Springs, I understand how crucial it is to continuously research and educate myself on tax laws. You need all of the details so you can stay informed. Here are 5 of the biggest tax changes to be aware of in 2021, and how they might impact you.
1. Child Tax Credit Changes
There are some important changes happening with the Child Tax Credit. These changes can help families receive advance payments of the Child Tax Credit this summer. Starting July 15, the IRS will pay half of the total amount in advance monthly payments. When you go to file your 2021 income taxes, you will be able to claim the other half. For children ages 05, the tax credit is $3,600 (previously $2,000). And for children ages 6-17, the tax credit is $3,000 (previously $2,000). You can qualify for advance payments if you have:
Filed your 2019 or 2020 tax return and claimed the Child Tax Credit on that return
Given the IRS your information in 2020 to receive Economic Impact Payment using the “Non-Filers: Enter Payment Info Here” tool
A home in the U.S. for more than half the year OR file a joint return with your spouse who has a home in the U.S. for more than half the year
A qualifying child under 18 at the end of 2021 who has a Social Security Number
Made less than income limits
It is important to note that these child tax credit changes only apply to 2021, and this increased child tax credit is only available to certain taxpayers under specific income thresholds.
2. Earned Income Tax Credit Changes
Earned Income Tax Credit (EITC) is designed to help low-to-moderate-income workers and families get a tax break. If you qualify for EITC, you will be able to use that tax credit to reduce the taxes you owe. In fact, you might even be able to increase your refund.
You may be eligible for the EITC if your income is low or moderate. The amount of tax credit you could receive is dependent on whether you have children or dependents and whether you are disabled, among a number of other criteria. The IRS also has Special Earned Income Tax Credit Rules for military and clergy, because this credit could impact other government benefits.
3. Tax Bracket Increases
Tax brackets are adjusted every year due to inflation, but it is still important to know when these changes happen. When tax brackets increase, you could be put into a different bracket than you were in the previous year. This would require you to pay a different tax rate for part of your income.
Check to see how your tax bracket may have changed this year. Here’s a look at 2021’s marginal tax rates:
10% on incomes $9,950 or less for single taxpayers
12% on incomes over $9,950 for single taxpayers, or $19,900 for married couples
22% on incomes over $40,000 for single taxpayers, or $81,050 for married couples
24% on incomes over $86,375 for single taxpayers, or $172,750 for married couples
32% on incomes over $164,925 for single taxpayers, or $329,850 for married couples
35% on incomes over $209,425 for single taxpayers, or $418,850 for married couples
37% on incomes over $523,600 for single taxpayers, or $628,300 for married couples
While most tax brackets increase every year, it is always good to check for yourself and make sure you know your rates and more. If you are unsure how to check or need additional information, you can check with a CPA.
4. Higher Standard Deductions
Standard deductions also change every year. The standard deduction for married couples filing jointly has increased $300, up to $25,100 for the 2021 tax year. The deduction for single taxpayers, or married people who are filing separately, has increased by $150, and is up to $12,550 for the year. For heads of households, the standard deduction has increased $150 and is now at $18,800. Higher standard deductions occur due to inflation and are one of the most important factors to note every year.
5. HSA Limits
Health Savings Account (HSA) funds are tax-advantaged medical savings accounts that are available to taxpayers who are enrolled in a high-deductible health plan. This year, the IRS announced they are increasing HSA contribution limits for the 2021 tax year. Because of this:
A qualifying individual can contribute up to $3,600
A qualifying individual with family coverage can contribute up to $7,200
Additionally, individuals who are 55 or older are also able to contribute an additional $1,000 every year.
Tax Preparation | Bennett CPA
No matter what time of the year it is, you can always stay up to date and be prepared for the next tax season. Knowing what tax changes to be aware of in 2021 is an integral part of making taxes easier to understand and can help you feel prepared. Whether you are already thinking about filing taxes next April or you just have questions about what has changed this year, Bennett CPA is available to answer all of your questions. Schedule a call today!