Doing Your Own Tax Return
If You’re Doing Your Own Tax Return Be Aware of these 7 Upcoming Tax Law Changes
Every year, and tax year 2021 will not be different, brings a few surprises to some of us. Even though a few tax changes are already announced, you might want to be aware of them. There are planned adjustments and changes because of inflation and phase-outs too. If you’re doing your own tax return, you need to be especially aware.
Proper financial planning provides a number of benefits for you. The first one is that you’ll have time to identify those adjustments you can make to get yourself better prepared for the future. None of us can forecast what lies ahead perfectly, but at least we’ll have the flexibility to respond and make changes as quickly as possible. If you’re doing your own tax return, as an example, you’ll have time to shop around for the best deal.
It’s so much easier to plan for the upcoming year if you know which tax changes will occur, and when. It may be a phase-out of certain deductions, what taxes will be adjusted because of inflation, or extensions of certain credits and benefits, knowing about them puts you in a better position to plan. If you’re doing your own tax return, or plan to switch from having them done by a professional, you’ll be better prepared.
We’ll highlight here the 7 changes planned for the tax year 2021:
1. Approval of the 2021 Consolidated Appropriations Act
This law was enacted to take effect for the tax year 2021, near the end of 2020. It contained several tax provisions that will have an effect on how we Americans file our taxes…at least for one more year.
There were several deductions and tax credits set to expire that were extended to the end of 2021. Plus, it provided for an expansion of other benefits tied in to tax relief due to the pandemic. Various provisions for disaster tax relief were expanded as well.
Here’s some of the many items that are included under the Act:
A tax credit advance payment of $600 for every taxpayer plus another $600 for each qualified child. The advance payment includes income phase-outs jut like the first stimulus checks that were sent.
The phase-out starts at $75,000 of the taxpayer’s modified adjusted gross income for a single person and doubles to $150,000 for a married couple. For some one filing as head of household status, the phase-out begins at $112,500.
The ability for a business to deduct 100% of certain meal costs was extended. It also clarified the $250 deduction for a qualified teacher, whereby personal protective equipment was a legitimate expense to be included in that $250 deduction.
The $300 deduction for qualified charitable contributions, if you file your own taxes using the standard deduction, was extended. For the tax year, 2021, that amount is doubled to $600 for joint filers. If you’re doing your own tax return using our EZ Tax program, we have you covered.
Another clarification was introduced as it pertains to the Paycheck Protective Program (PPP). It says that any amount forgiven under the program is not included in a taxpayer’s gross income. Plus, any expenses that were paid with any forgiven loans, are fully deductible.
2. Inflation adjustments
Normally the prices we pay for goods and services will increase gradually over time. Hopefully, our income does too. The US tax code allows for these inflationary increases so that income taxes don’t grow faster than our income. If not, this would cause financial stress for many individuals.
For the tax year 2021, tax brackets, eligibility for various credits and tax deductions, as well as the standard deduction, will adjust to account for inflation. The new standard deduction for a married couple will increase by $300 to $25,100. For single and married filing separate filers, the standard deduction will be $12,550. Head of household filers will have a standard deduction of $18,800. If you do your own income tax return by buying a do it yourself tax package from a store, this is one of the items you need to check.
3. Tax increases planned for 2021
As we mentioned earlier in this article, tax brackets, who is eligible for tax credits and certain deductions, and the increased standard deduction, will see increases because of inflation. After the Tax Cuts and Jobs Act enacted in December 2017, another law was passed that changed the method used to calculate the inflation percentage.
Under prior law, the Consumer Price Index (CPI) was used to calculate that number. Now, tax reform uses what they call “chained CPI” to measure the amount of inflation.
The new method measures inflation in a somewhat slower rate. They say that items that have undergone a large price increase, will not get purchased as much as before the large price increase. Some economists say that taxpayers could be pushed into a higher marginal tax bracket than before tax reform. This would be caused by increases to their paycheck by cost of living increases that outpace the chained CPI.
4. Adjustments for phaseout of credits and deductions
Inflationary adjustments for tax credits and certain deductions, will change in 2021. Some of these are:
a. The earned income tax credit – If you file married joint as a married couple and claim three or more qualifying dependents, the maximum amount increases to $6,660 for the tax year 2021. The phase-out number begins at $56,844 of your AGI. If you file as a single person, with no qualifying dependents, your maximum credit is $538 and the phase-out begins at $15,820 of your AGI.
b. Alternative minimum tax – For the year 2021, you’ll have higher exemptions as well as phase-outs of income. If you’re doing your own tax return, you’ll want to check this.
c. IRA contributions – Amounts for contributions won’t change in 2021, but the phase-out amounts that qualify you to take the deduction for contributions will increase. If you’re an active participant in your employer’s retirement plan, the phase-out levels for taking a deduction for an IRA will begin with AGI’s from $66,000 and $76,000 for single and head of household filing status. For joint filers, it will be $105,000 and $125,000.
If you don’t participate in your employer’s retirement plan, but your spouse does, your phase-out range is from $198,000 up to $208,000 for married filing joint taxpayers. If you file as married separate, the phase-out range isn’t subject to the cost of living adjustment, and will remain at $0 up to $10,000.
If you and your spouse have no employer retirement plan, phase-outs don’t apply.
5. Changes planned for the alternative minimum tax
The primary purpose for the alternative minimum tax that was created by Congress, was to insure that wealthy taxpayers wouldn’t be able to take unfair advantage by taking too many deductions, tax credits, and other loopholes to avoid paying taxes.
Prior to 2013, AMT’s exemption amounts didn’t adjust automatically for inflation. Because of that, many more middle income taxpayers were reeled in and got hit by this tax. In 2013, Congress corrected this unfair tax by putting in a permanent annual update. The current law now provides for an automatic annual adjustment for inflation and allows many middle income taxpayers to avoid this tax. If you’re doing your own tax return at EZ Tax, we’ve got you covered.
For the past tax year, 2020, the exemption amount was $72,900 and started to phase-out at $ 518,400. For the tax year 2021, the exemption increases to $ 73,600 and the phaseout starts at $523,600
6. Changes and adjustments to retirement plan distributions
Many taxpayers are aware of one of the provisions in the Cares Act that permitted individuals who were impacted by Covid-19, to make distributions of up to $100,000 from their retirement accounts. They were allowed to make these withdrawals and not have to pay the 10% early withdrawal penalty.
The Cares Act also eased up on requirements in place whereby retirees had to take a required minimum distribution (RMD) from their retirement accounts. Waiver of the 10% penalty and the easing up of RMDs for retired taxpayers only applied to the tax year 2020. If Congress doesn’t extend it, this change has expired and will not apply to 2021. If you’re doing your own tax return at EZ Tax, we have you covered.
7. Other Cares Act provisions that expired at the end of 2020
A lot of financial relief was provided by the Cares Act, however, only for a short period of time for many. Some of the provisions have already been extended and many more expired at the end of 2020.
For the unemployed, the Cares Act legislation kept many families afloat, and out of bankruptcy. Millions of workers, who were out of a job because of Covid-19, received payments of $600 each week. The act also set up two additional programs that provided relief to unemployed workers.
The first program called Pandemic Unemployment Assistance (PUA) provided assistance to workers who didn’t receive unemployment benefits. These workers are self employed people, such as gig workers and freelancers.
The second program known as Pandemic Emergency Unemployment Compensation (PEUC). It provided an extension of unemployment benefits received through state programs from 26 weeks up to 39 weeks.
Some of the programs in the legislation have expired and a few more were extended for another year. One in particular, permits employees to avoid paying taxes on any student loan payments made by their employer. This extension runs through December 31, 2021. Do your taxes yourself at EZ Tax and don’t sweat it.
One portion of the Act that provided certain subsidies to employers who offer leave per the terms of Family and Medical Leave Act, was extended to 2025.
Now is the time to start your 2021 tax planning
A lot of the tax changes will take effect this year, and the best way to take advantage, is to start now rather than later. Maybe you can contribute more to a retirement plan, or open an HSA. These two areas alone, can provide money you will need in the future, and help to lower your tax bill this year.
When tax time rolls around, we hope to see you at EZ Tax/1040.com, to do taxes on your own. Just answer a few simple questions that pertain to your tax situation, and we’ll do the rest for you. We’ll get all the right tax form no matter if you have a simple return or a very complex one. We have you covered.