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.
Understanding Tax Credits: Opportunities for Savings
Tax credits can significantly reduce your tax bill, making them a vital aspect of your financial planning. Unlike deductions that lower your taxable income, tax credits directly reduce the amount of tax you owe, dollar for dollar. Some popular tax credits include the Earned Income Tax Credit (EITC) and the Lifetime Learning Credit, which can provide substantial benefits to low to moderate-income earners and those pursuing education, respectively. It's important to research all available credits, as many taxpayers miss out on these valuable savings due to lack of awareness or misunderstanding of eligibility requirements.
Changes in Retirement Account Contributions
Another important change for taxpayers revolves around retirement account contributions. For the tax year 2021, the contribution limits for 401(k) plans and IRAs have seen some adjustments. Employees can contribute up to $19,500 to their 401(k) plans, with an additional catch-up contribution of $6,500 allowed for those aged 50 and over. Similarly, IRA contribution limits have increased to $6,000, with a $1,000 catch-up contribution for individuals aged 50 and older. These changes encourage individuals to invest in their future, making it crucial to maximize contributions to take advantage of potential tax benefits.
Navigating Deductions for Homeowners
For homeowners, understanding mortgage interest deductions is critical in navigating tax implications. The Tax Cuts and Jobs Act has imposed new limitations on the deductibility of mortgage interest, particularly for loans taken out after December 15, 2017. Homeowners can now deduct interest on mortgage debt up to $750,000 for new loans. However, those who had existing mortgages prior to this date are still allowed to deduct interest on debt up to $1 million. Additionally, property taxes are deductible, but with the SALT cap, homeowners may find their deductions limited, necessitating careful planning to optimize their tax situations.
State and Local Tax Implications to Consider
State and local taxes (SALT) are often overlooked, yet they can significantly affect your overall tax liability. The Tax Cuts and Jobs Act imposed a cap on the SALT deduction at $10,000, which means that taxpayers in states with high taxes may feel particularly impacted. Understanding how your state taxes income, sales, and property is paramount for optimal tax planning. Additionally, some states have their own tax credits and deductions that can provide substantial savings. Keeping abreast of these regulations and changes can empower you to make informed financial decisions and potentially mitigate your state tax burden.
The Importance of Tax Planning Throughout the Year
Tax planning is not just a once-a-year task but a continuous process that can yield significant benefits. By actively managing your finances throughout the year, you can make strategic decisions that enhance your tax situation. This includes timing income and expenses, maximizing retirement contributions, and understanding the impact of life events like marriage or having children on your tax status. Engaging with a tax professional or using tax planning software can help you identify potential deductions and credits, ensuring that you’re not leaving money on the table when it comes time to file your tax return.
Staying Informed: Resources for Tax Changes
Staying updated on tax changes is essential for effective financial management. The IRS website is a valuable resource for taxpayers, providing the latest information on tax laws, deadlines, and forms. Additionally, reputable financial news outlets and tax preparation services often offer insights into upcoming changes that may affect your taxes. Joining tax-related webinars or local workshops can also enhance your understanding of complex tax issues. By proactively seeking out information and resources, you can better prepare for tax season and ensure that you’re informed about relevant tax law shifts that could impact your filings.