Tax Changes in 2021
Whether you filed your 2019 taxes yet or not, believe it or not, you can begin thinking about start thinking about your 2020 return—due April 15, 2021.
The sooner you educate yourself about tax changes, the more time you will have to take advantage of them. (Remember, there are advantages to filing taxes early, too!)
Here are eight ways your taxes filed in 2021 will differ from your prior-year return:
1. HIGHER HEALTH SAVINGS ACCOUNT (HSA) LIMITS
Contribution limits for health savings accounts (HSAs) typically increase year by year due to inflation. This is no different for your 2020 tax return. In fact, the contribution limits for HSA-eligible workers with high-deductible health insurance policies are:
- Self-only coverage: $3,550 — ($50 increase from the previous years’ return)
- Family coverage: $7,100 — ($100 increase from the previous years’ return)
2. WAIVED REQUIRED MINIMUM DISTRIBUTIONS
The CARES Act waived required minimum distributions (RMDs) for 2020 tax returns. In a normal tax year, they are taxable income. This could mean that some retirees will have lower taxable incomes, thus owe less in federal income taxes in 2021.
3. CHARITABLE DEDUCTION CHANGES
To encourage U.S. citizens to contribute money to charity during the Coronavirus pandemic, the IRS is allowing you to deduct as much as $300 in cash contributions made during 2020 — even if you go for the standard deduction. (This tax change is also a part of the CARES Act.)
Typically, taxpayers are allowed to write off tax-deductible charitable donations on their federal tax returns if they itemize deductions (as opposed to taking the standard deduction). If you itemize deductions on your 2020 tax return, you aren’t subject to the $300 limit for charitable contributions. In addition, you can elect to deduct cash contributions made in 2020 of up to 100% (increased from 60%) of your adjusted gross income (AGI).
4. ADOPTION CREDIT CHANGES
The tax credit for qualified adoption expenses increased $220 from the previous tax year. The maximum allowable credit amount is $14,300 for 2020 tax returns.
5. HIGHER INCOME BRACKETS
Tax brackets often change from tax year to tax year, again due to inflation. The tax rates didn’t change for your 2020 tax return, however, the tax bracket amounts were adjusted to account for inflation.
- 37% tax rate: Applies to the taxable income of more than $518,400
- 35%: More than $207,350 but not more than $518,400
- 32%: More than $163,300 but not more than $207,350
- 24%: More than $85,525 but not more than $163,300
- 22%: More than $40,125 but not more than $85,525
- 12%: More than $9,875 but not more than $40,125
- 10%: Income of $9,875 or less
For married filing jointly, there are the 2020 income tax rates:
- 37% tax rate: Applies to taxable income of more than $622,050
- 35%: More than $414,700 but not more than $622,050
- 32%: More than $326,600 but not more than $414,700
- 24%: More than $171,050 but not more than $326,600
- 22%: More than $80,250– but not more than$171,050
- 12%: More than $19,750– but not more than $80,250
- 10%: Income of $19.750 or less
View more related information about IRS withholding tax tables for 2020 tax returns.
6. NEW STANDARD DEDUCTION AMOUNTS
Standard deductions reduce your taxable income amount, and they typically increase each year due to inflation. For 2020 taxes due in 2021, the standard deduction amounts (based on tax filing status) are:
- Married filing jointly: $24,800 — up $400 from 2019 tax returns
- Married filing separately: $12,400 — up $200 from 2019 tax returns
- Head of household: $18,650 — up $300 from 2019 tax returns
- Single: $12,400 — up $200 from 2019 tax returns
7. INCREASED CONTRIBUTION LIMITS FOR LIMITED WORKPLACE RETIREMENT ACCOUNTS
In addition to the many changes in the Secure Act, limits for workplace retirement accounts for 2020 returns have been adjusted for inflation. The base contribution limit for 401(k) plans is $19,500, up to $500 from the previous tax year. The limit for catch-up contributions (anyone 50 and over can make these), is $6,500, up to $500 from the previous tax year.
8. Higher Limits for the Saver’s Credit
For 2020, the Saver’s Credit has higher income limits. You’re eligible for the Saver’s Credit if your income is no more than…
- Married filing jointly: $65,000 — up $1,000 from the previous tax year
- Head of household: $48,750 — up $750 from the previous tax year
- All other tax-filing statuses: $32,500 — up $500 from the previous tax year