All of us want to forget 2020, but one thing you must complete before you rid 2020 from your mind forever are your taxes. Because of Coronavirus, and other factors, quite a bit has changed for the 2021 tax season. Here are some important things you need to know:
- Tax Day is Thursday, April 15, 2021. You must file your 2020 taxes by 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
For the 2020 tax year, the tax rates are the same, but the brackets have been adjusted by a few hundred dollars from 2019 to account for inflation.
Marginal Rates: For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:
- 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
- The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
Higher Standard Deductions in 2020
For tax year 2020, the standard deduction went up slightly to adjust for inflation.
The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
Tax Deductions and Credits
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.
Tax credits on the other hand will lower your actual tax bill dollar for dollar and there are two types: 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. But if its nonrefundable, your tax bill will be reduced to zero, but you won’t get a refund.
Here are some deductions and credits that you may be able to claim on your 2020 taxes:
- Charitable deductions
- Medical deductions
- Business deductions
- Earned Income tax credit
- Child tax credit
COVID and Your Taxes
Stimulus Check – Your stimulus check will not count as taxable income. Instead, it is acting like an advance on money you would have received anyway as part of your tax refund in 2021.
Paycheck Protection Program (PPP) Loans – As long as these loans were used on certain business expenses (payroll, rent, or interest on mortgage payments, and utilities) these loans are forgiven.
Unemployment Benefits – Those who received unemployment benefits will need to pay income taxes on that money if taxes were not already taken out.
Retirement Plans: 401(k)s, IRAs, and More
- The CARES Act allows people under the age of 59 ½ to take up to $100,000 out of their 401(k) and IRAs up until the end of 2020 without having to pay an early withdrawal penalty. The money you take out of tax-deferred retirement accounts like a traditional 401(k) or IRA will be taxed as ordinary income, so you will have to pay taxes on any withdrawals you make.
- If you have a traditional IRA, you have to take money out of your account once you reach a certain age. The SECURE Act pushed back the age for these required minimum distributions (RMD) from 70 ½ to 72 (if your birthday was July 1, 2019 or later). The CARES Act is also allowing seniors to skip RMDs altogether in 2020 without penalty.
- The SECURE Act is also allowing owners of traditional IRAs to keep putting money in their accounts past 70 ½ starting in 2020. Since the money you put into a traditional IRA is tax deductible, you could lower how much of your income is taxed this year.
At Westport Federal Credit Union, we know life is complicated enough. If you are in need of a loan to pay off taxes you owe, visit us at westport.org to apply online 24/7. Secure your financial future with us.
Sources: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021
