As the tax season quickly approaches, it's essential for Americans to be aware of the significant tax changes that have occurred. Not only can these alterations drastically impact your financial situation, but understanding them can also help you take advantage of potential benefits. This article will shed light on the five most considerable tax changes that every American needs to know.
Changes related to Standard Deduction
The first significant change revolves around the standard deduction. The tax reform of 2017 nearly doubled the standard deduction, which resulted in fewer taxpayers itemizing their deductions. However, the standard deduction for 2021 has been slightly increased from the previous year. For singles and married individuals filing separately, the standard deduction rose to $12,550, up $150 from 2020. For married couples filing jointly, it increased to $25,100, up $300 from the year before.
Stimulus Check Exemption
The second change involves the economic impact payments, also known as stimulus checks. These payments are not considered taxable income. Instead, they are prepaid tax credits for your 2021 tax return. If you did not receive a stimulus payment or received less than you were eligible for, you could claim the Recovery Rebate Credit when you file your 2021 taxes.
Expanded Child Tax Credit
The American Rescue Plan Act of 2021 expanded the Child Tax Credit, making it fully refundable and increasing the amount to $3,000 per child aged six to 17 and $3,600 for children under six. Moreover, half of this credit could be received in advance through periodic payments in 2021. However, these changes are set to expire after 2021 unless Congress takes further action.
Unemployment Compensation Exclusion
Unemployment benefits typically count as taxable income. However, the American Rescue Plan of 2021 introduced a unique provision where the first $10,200 of unemployment compensation received in 2020 would not be taxable for households with an adjusted gross income of less than $150,000. This provision was a one-time change and does not apply to unemployment compensation received in 2021.
Change in Tax Brackets
Lastly, the tax brackets have been adjusted for inflation. This change means that the income thresholds for each tax bracket have increased slightly. This adjustment can result in a lower effective tax rate, depending on where your income lands within these adjusted brackets.