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2021 Tax Year Changes

Another year of dealing with COVID-19 has led to tax law changes for the 2021 season. Here are some of the most significant changes for individual taxpayers and how to prepare, according to Hilltop’s Tax Pros.

Higher Deductions for Medical Expenses

Unreimbursed medical expenses that exceed a certain percentage of your income are tax-deductible.

The percentage, known as the “floor,” has been between 7.5 percent and 10 percent of one’s adjusted gross income for the past several years. For the 2021 tax season, it’s back down to 7.5 percent.

If your AGI is $100,000, you can deduct unreimbursed medical expenses that exceed $7,500. However, to qualify, you need to itemize your deductions.

Higher Standard Deductions

You can either take the standard deduction to reduce your tax bill or itemize when you pay taxes.

For the 2021 tax season, the standard deduction is bumped up to:

  • $12,550 for single filers and married couples filing separately (up $150 from 2020).
  • $18,800 for heads of households (up $150 from 2020).
  • $25,100 for married couples filing jointly (up $300 from 2020).


If you’re age 65 or older, you can add an extra $1,350 per person if married and filing jointly or an extra $1,700 for household heads and single filers.

However, if you take the standard deduction, you miss out on certain individual deductions, such as the unreimbursed medical expenses.

Updated Income Brackets

Tax rates remain unchanged for 2021, but the brackets themselves expanded to account for inflation.

The 2021 tax brackets are:

  • 37 percent for incomes over $523,600 ($628,300 for married couples filing jointly).
  • 35 percent for incomes over $209,425 ($418,850 for married couples filing jointly).
  • 32 percent for incomes over $164,925 ($329,850 for married couples filing jointly).
  • 24 percent for incomes over $86,375 ($172,750 for married couples filing jointly).
  • 22 percent for incomes over $40,525 ($81,050 for married couples filing jointly).
  • 12 percent for incomes over $9,950 ($19,900 for married couples filing jointly).
  • 10 percent for incomes of $9,950 or less ($19,900 for married couples filing jointly).

RMDs Are Back

Once you reach age 72, the IRS says you must start withdrawing money annually from tax-advantaged retirement accounts, including traditional IRAs and 401(k)s. And your required minimum distributions, or RMDs, count as fully taxable income (the withdrawals help ensure that people don’t use retirement accounts to avoid taxes).

The Coronavirus Aid, Relief, and Economic Security (CARES) Act paused these forced withdrawals for 2020, but RMDs are back for 2021. Seniors who will be at least 72 years old by the end of 2021 must take their RMDs from their tax-advantaged retirement accounts by December 31, 2021.

And if you fail to withdraw an adequate amount by then, there’s a 50 percent excise tax on the money you were supposed to take.

Get A $300 Charitable Deduction, Even If You Don't Itemize

The government continues to encourage Americans to lend a hand to those in need.

You could only deduct charitable giving if you itemized your deductions in years past. In 2020, the rules changed to allow a $300 charitable contribution deduction per tax return on top of the standard deduction.

For the 2021 tax year, that benefit has expanded even further. Instead of a $300 deduction per return, it’s $300 per person. So, if you file jointly with the standard deduction, you can deduct up to $600 for charitable contributions.

That said, there are benefits to itemizing charitable contributions.

Before 2020, you could deduct charitable contributions up to 60 percent of your adjusted gross income. 

The CARES Act raised this limit, allowing you to deduct up to 100 percent of your AGI, and this temporary change was extended through 2021.

Also, keep in mind that the IRS closed the 2020 filing season with more than 35 million unprocessed tax returns — a fourfold increase from 2019, according to the National Taxpayer Advocate. Unfortunately, we can’t be sure if this upcoming season will be just as bad. 

To get a head start on your taxes, you’re encouraged to request a 2021 Tax Year Organizer by emailing MeganWashington@HilltopTax.com or visit hilltopwealthsolutions.com/tax-checklist.

Disclaimer

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Hilltop Wealth Solutions is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. While efforts are made to ensure information contained herein is accurate, Hilltop Wealth Solutions cannot guarantee the accuracy of all such information presented.

© 2022 Hilltop Wealth and Tax Solutions

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