Tax season is stressful enough during a “normal” year.  2020 brought us to our knees and the impact of the health crisis and economic turmoil that Coronavirus inflicted upon us, has added layers of complexity and heightened stress levels even more.

So, what changes have taken place and what can we expect for the 2021 tax season? For starters, the date for submission of tax returns was two weeks later this year (Feb. 12).  The tax agency needed more time to program its systems to reflect new tax rules.  Beyond that, there are many other changes you should be aware of.

Will My Stimulus Money Be Taxed?

No, the money you received as a result of the economic stimulus (CARES Act) will be treated like a refundable tax credit for 2020. If you did not receive your first or second stimulus check by January 15, you can claim it as a recovery rebate credit on your upcoming tax return.  You can also do this if you did not receive the correct amount of funds.  Also, if you gave birth in 2020, you would not have received stimulus payments for those children, but that is an additional refund that could come to you on your 2020 tax return.

Educational Expenses and 529s

Due to the pandemic, a lot of schools were remote, or some even cancelled classes. Your college may have refunded some of your ESP or 529 money back to you.  If you do not put the money back into the account within 60 days of being issued the refund or use it to cover other educational expenses, you may have to pay income taxes and a 10% withdrawal penalty.

I Received Unemployment Benefits.  What Do I Need to Know?

Any unemployment benefits you received in 2020 will be considered taxable income.  You will be sent a form that will resemble that of a W-2.  You will need to provide this to your tax professional, so they can file it with your return.  Whether you lost your job, were furloughed or are a freelancer or self-employed, there are two ways you can pay your taxes on those unemployment benefits.  You can have 10% of each payment withheld to cover all or a portion of what you owe in federal income taxes, or if you chose not to have taxes withheld, you will be required to pay quarterly estimated taxes.

Paycheck Protection Program (PPP) Loans

As of December 2020, per the IRS, any eligible expenses (things like payroll, rent or interest on mortgage payments, utilities, etc.) you paid with money from the PPP loan can be deducted from your taxable income. The Small Business Administration must approve your loan forgiveness application first though.

I Worked Remotely from a Different State. How Will This Impact My Taxes?

Each state has its own tax system and tax rules.  If you live in one state and work in another, you could be taxed on both.  Some states have reciprocity agreements that prevent income from being taxed twice.  Others have agreed to offer tax relief to remote workers during the pandemic.  The key is understanding your situation and what your state’s stance on the matter is.

I Took Out Money from my 401(k).  Now What?

Through the CARES Act, people could take a “hardship withdrawal” not to exceed $100,000 from out of their retirement accounts by December 2020, without having to pay the 10% early withdrawal penalty.  Keep in mind, should you choose to do this, you run the risk of being pushed into a higher tax bracket and owing even more taxes.  You still must pay income taxes on any money taken out of your retirement accounts (401ks and IRAs).  If you did take money out of your retirement accounts, you can return any money withdrawn within the next three years and file an amended return.

Let’s move on from the pandemic related tax issues to the more typical tax changes that we are used to and that we can expect to see in 2021.

Standard Deduction

Annual inflation adjustments moved the standard deduction upwards slightly.

FILING STATUS STANDARD DEDUCTION FOR 2021 TAX YEAR CHANGE FROM 2020
Single $12,550 +$150
Married filing jointly $25,100 +$300
Head of household $18,800 +$150
Married filing separately $12,550 +$150

Source: IRS

For those who are 65 and older or blind, there is an added amount.  For married couples, the extra amount is $1,350 and for single filers age 65 or older, the extra amount is $1,700. For married couples who are joint filers, each spouse can get the added amount.

Tax Credits

A tax credit is a dollar-for-dollar reduction of the income tax you owe.  For example, if you owe $2,000 in federal taxes but are eligible for a $1,000 tax credit, you will only need to pay $1,000.

  • Earned Income Tax Credit – Gives reductions in taxes to workers with low to mid-level incomes. $6,728 for those with three or more children, $5,980 for those with two children, $3,618 for those with one child, and $543 for those with no children. The income limits are up slightly from last year.
  • Savers Tax Credit – Pays up to $1,000 per person (for low to middle-income taxpayers) to encourage retirement contributions. Depending on your income, you can get a credit for 10%, 20% or 50% of up to $2,000 in contributions to a retirement account. The income limits are up slightly from last year as well.
  • Lifetime Learning Tax Credit – Reduces your tax bill for a portion of the tuition, fees and other qualifying expenses you pay for yourself, a spouse or dependent to enroll in school. It offers additional education tax breaks beyond traditional college. A 20% credit on up to $10,000 in eligible expenses per year is available to taxpayers making less than $59,000 in 2021 if single or $119,000 if filing jointly, with reduced credits available up to $69,000 in income for singles and $139,000 for joint filers. The credit can be applied to graduate school, vocational training, and other non-traditional educational expenses.

Retirement Account Income Limits

FILING STATUS ROTH IRA PHASE-OUT RANGE TRADITIONAL IRA PHASE-OUT RANGE IF WORKER HAS EMPLOYER-SPONSORED RETIREMENT ACCOUNT TRADITIONAL IRA PHASE-OUT RANGE IF SPOUSE HAS EMPLOYER-SPONSORED RETIREMENT ACCOUNT
Single $125,000 to $140,000 $66,000 to $76,000 N/A
Married filing jointly $198,000 to $208,000 $105,000 to $125,000 $198,000 to $208,000
Married filing separately $0 to $10,000 $0 to $10,000 $0 to $10,000

Source: IRS

 

2021 Tax Brackets

RATE SINGLE INDIVIDUALS MARRIED FILING JOINT HEADS OF HOUSEHOLDS
10% Up to $9,950 Up to $19,900 Up to $14,200
12% $9,951 to $40,525 $19,901 to $81,050 $14,201 to $54,200
22% $40,526 to $86,375 $81,051 to $172,750 $54,201 to $86,350
24% $86,376 to $164,925 $172,751 to $329,850 $86,351 to $164,900
32% $164,926 to $209,425 $329,851 to $418,850 $164,901 to $209,400
35% $209,426 to $523,600 $418,851 to $628,300 $209,401 to $523,600
37% Over $523,600 Over $628,300 Over $523,600
Source: Internal Revenue Service
2021 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households

Long-term Capital Gains and Qualified Dividends

Certain dividends and capital gains on investments held longer than a year can get you a lower tax rate on that portion of your income.

TAX RATE ON INCOME SINGLE MARRIED FILING JOINTLY HEAD OF HOUSEHOLD MARRIED FILING SEPARATELY
0% Up to $40,400 Up to $80,800 Up to $54,100 Up to $40,400
15% $40,400 to $445,850 $80,800 to $501,600 $54,100 to $473,750 $40,400 to $250,800
20% Above $445,850 Above $501,600 Above $473,750 Above $250,800

Source: IRS

Charitable Tax Deduction

The above-the-line tax deduction for gifts of cash to charity will increase for 2021.  It will go up to $300 for individuals and up to $600 for joint filers for 2021. Essentially, it is an amendment to the new one-year tax break Congress put in for 2020 under the CARES Act: a tax deduction for cash gifts to charity up to $300. The deduction was limited to $300 per tax return in 2020. The new provision allows a married couple filing jointly to get double the deduction for 2021 if they make $600 in cash gifts to charity. Gifts to donor-advised funds and private foundations do not count.

Estate and Gift Tax Limits

For 2021, the estate and gift tax exemption are $11.7 million per individual, up from $11.58 million in 2020.  So, an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, while a married couple could protect $23.4 million.

Tax season is not for the faint of heart.  Ask questions, keep your receipts and records, stay organized and do your homework.  2020 is behind us but tax season is a powerful reminder of just how much it impacted all of us.

Sources: CNBC/ IRS/ Forbes/ Dave Ramsey/ MSN

© Geier Asset Management, Inc. February 2021. Dan Mules, CPA is a Client Manager and Tax Planning Professional for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of February 2021 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.