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Tax Season 2021: What You Need to Know

If you’re like us, you probably never want to think about 2020 again. But there is one lingering ghost from last year that you need to get rid of before you can truly move on for good—and that’s your 2020 taxes.

Thanks to the coronavirus (among other things), a lot has changed for the 2021 tax season. We don’t want you to get blindsided, so let’s dig into what’s new for this tax season and what’s staying the same.

First, here are the main things you need to know right off the bat for the 2021 tax season:

  • The big tax deadline is a moving target this year, what with the effects of COVID-19 and ice storms. The IRS recently extended the deadline for all federal tax returns and payments to May 17, 2021.
  • 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. 

But that’s just scratching the surface! Let’s break down the details so you can file your taxes with confidence this year.

Income Brackets and Rates for 2021 Tax Season

Here’s a refresher on how income brackets and tax rates work: Your tax rate (the percentage of your income that you pay in taxes) is based on what tax bracket (income range) you’re in.

Taxes shouldn't be this complicated. Let us help.

For example, if you’re single and your income is $75,000, then you’re in the 22% tax bracket. But that doesn’t mean your tax rate is a flat 22%. Instead, part of your income is taxed at 10%, another part at 12%, and the last part at 22%. (We break it down in the chart below.)

For the 2020 tax year, the tax rates are the same—but there are some slight changes to the brackets. Basically, the brackets have been adjusted by a few hundred dollars from 2019 to account for inflation.1

2020 Marginal Income Tax Rates and Brackets

2020 Marginal Tax Rates

Single Tax Bracket

Married Filing Jointly Tax Bracket

Head of Household Tax Bracket

Married Filing Separately Tax Bracket

10%

$0–9,875

$0–19,750

$0–14,100

$0–9,875

12%

$9,875–40,125

$19,750–80,250

$14,100–53,700

$9,875–40,125

22%

$40,125–85,525

$80,250–171,050

$53,700–85,500

$40,125–85,525

24%

$85,525–163,300

$171,050–326,600

$85,500–163,300

$85,525–163,300

32%

$163,300–207,350

$326,600–414,700

$163,300–207,350

$163,300–207,350

35%

$207,350–518,400

$414,700–622,050

$207,350–518,400

$207,350–311,025

37%

Over $518,400

Over $622,050

Over $518,400

Over $311,025

 

Higher Standard Deductions in 2020

When you pay taxes, you have the option of taking the standard deduction or itemizing your deductions—calculating your deductions one by one. Itemizing is more of a hassle, but it’s worth it if your itemized deductions exceed the amount of the standard deduction.

For tax year 2020, the standard deduction went up slightly to adjust for inflation.2

 

Standard Deduction

Filing Status

2019

2020

Single

$12,200

$12,400

Married Filing Jointly

$24,400

$24,800

Married Filing Separately

$12,200

$12,400

Head of Household

$18,350

$18,650

 

Keep in mind that every situation is different regarding taking the standard deduction or itemizing. Talk to a tax pro to figure out what's best for you.

Not sure whether or not you want to use a tax pro this year or file yourself? Our easy tax quiz can help you figure out which option is best for you.  

Tax Deductions and Credits to Consider for Tax Season 2021

The closest things to “magic words” when it comes to taxes are deductions and credits. Both help you keep more money in your pocket instead of Uncle Sam’s, but in subtly different ways.

Tax deductions help lower the amount of your income that can actually be taxed. Some deductions are only available if you itemize your deductions, while others are still available even if you decide to take the standard deduction. 

Tax credits, on the other hand, are dollar amounts actually subtracted from your tax bill, 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. Score! If it’s a nonrefundable credit, your tax bill will be reduced to zero, but you won’t get a refund. Still a win!

Here are some deductions and credits you might be able to claim on your 2020 tax return:

1. Charitable Deductions

In an effort to encourage more charitable giving, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows you to deduct up to 100% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken, in qualified charitable donations if you plan to itemize your deductions.3

What if you’re taking the standard deduction? Well, the CARES Act added a new “above-the-line” deduction that will help you write off up to $300 of charitable contributions you made in cash.4  

2. Medical Deductions 

If you found yourself with hefty medical bills last year, you might be able to find at least some tax relief.

You can deduct any medical expenses above 7.5% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken.5 For example, if your AGI was $100,000, you can deduct out-of-pocket medical expenses beyond $7,500 in 2020. But you have to itemize your deductions in order to write off those expenses on your tax return. 

3. Business Deductions

If you’re self-employed, there are a bunch of deductions you can claim on your tax return—including travel expenses and the home office deduction if you use a part of your home to conduct business.6

But if you’re one of the millions of workers who were sent home to work remotely, you won’t be able to claim the home office deduction since it’s reserved for self-employed individuals only. Sorry!

4. Earned Income Tax Credit

The EITC is a refundable credit designed to help out low- and middle-income workers (workers earning up to $56,844 during the 2020 tax year might be eligible).7 Depending on your income, your filing status and number of children, the credit could save you anywhere from a few hundred to a few thousand dollars on your taxes. But here’s a crazy stat: About 1 out of 5 eligible taxpayers either don’t claim the benefit on their taxes or don’t file a tax return at all.8 Don’t let that be you!

5. Child Tax Credit

Got kids? For 2020 taxes, families can claim up to $2,000 per qualified child as a tax credit (the income limits for this credit are $200,000 for single parents and $400,000 for married couples). And since this is a refundable credit, your family can receive up to $1,400 per child as a refund.9  Due to the passing of the American Rescue Plan, the child tax credit is set to change for 2021 taxes. The per child credit will go up to $3,000 or $3,600 depending on the child’s age.10

There are plenty of other deductions and credits that might be up for grabs depending on your situation! If you don’t want to miss out on any tax savings, you’ll want to work with a tax advisor who can make sure you’re not leaving anything on the table.

The Coronavirus and Your Taxes

Oh, so you thought you were done with the coronavirus now that it’s 2021? Unfortunately, the coronavirus has created a ripple effect that will be felt when you sit down to file your taxes for last year. Here are some things to keep in mind:

Stimulus Checks

As part of the CARES Act’s $2 trillion relief package, the government sent up to $1,200 in the form of a stimulus check to millions of Americans shortly after the pandemic shut most of the country down.11

The good news is your stimulus check will not count as taxable income. Instead, it’s being treated like a refundable tax credit for 2020. Translation: Your stimulus check is sort of like an advance on money you would have received anyway as part of your tax refund in 2021.

Paycheck Protection Program (PPP) Loans

The CARES Act also tried to help struggling small business owners stay afloat by offering them 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, to name a few—these loans were designed to be “forgiven.”12

In December 2020, the IRS announced that any eligible expenses you paid with money from those PPP loans can be deducted from your taxable income.13 So that’s a little bit of good news! But remember, you’ll have to get your loan forgiveness application approved by the Small Business Administration before you’re off the hook for the amount you borrowed.

Unemployment Benefits

After the pandemic stalled a large part of the economy, many Americans found themselves out of work (at least temporarily) and turned to unemployment insurance for help. It was initially the plan for those who received unemployment benefits to pay income taxes on that money.14  

This changed with the passing of President Biden’s Coronavirus relief package, aka the American Rescue Plan (ARP), in March.

The approved version of the ARP makes the first $10,200 of unemployment benefits tax-free if your annual household income is less than $150,000.15 That could mean a few different things for you if you got unemployment benefits in 2020:

  1. You’re probably going to owe less than you thought on taxes.
     
  2. This is important: If your unemployment benefits exceeded $10,200, you’ll still need to report the excess as taxable income. Example: You received $10,500 in unemployment benefits. That’s $300 over the $10,200 tax-free limit, so you need to claim that $300 as income and pay taxes on it.
     
  3. If your household income is over $150,000, you’ll need to report all of your unemployment benefits just as you would have before the passing of the ARP.
     
  4. If you already filed your taxes and claimed unemployment benefits . . . you’ll need to go back in and amend your returns.

Now, before you get too discouraged about the extra work (and possibly extra money) to file an amended return, remind yourself that you’re going to benefit financially. This change could save you over $1,000—possibly over $2,000—in taxes!

Educational Expenses: 529 Plans and ESAs 

Any money you take out of a 529 plan or Educational Savings Account (ESA) must be used for qualified educational expenses in order to be tax-free. Makes sense. But a lot of schools went remote or cancelled classes this year—which means your college might have refunded some or all of your 529 or ESA money. If that’s the case, you have 60 days to put the money back in the account or use it to cover other educational expenses. If you didn’t, you might have to pay income taxes and a withdrawal penalty.16

There are also a couple of new ways you can use 529 plans in 2020 without having to pay any taxes. First, you can now use 529 plans to pay for the costs of certain apprenticeship programs—including fees, books and supplies. And second, you can also use money from a 529 plan to pay off up to $10,000 in student loan debt (that’s $10,000 total—not annually) without having to pay any penalties or taxes.17

Retirement Plans: 401(k)s, IRAs and More

There were a lot of changes to retirement plans in 2020—and some of those changes could impact your tax bill this year. Let’s tackle each of those major changes:

  • The CARES Act allowed folks under age 59 1/2 to take up to $100,000 out of their 401(k)s and IRAs up until the end of 2020 without having to pay an early withdrawal penalty.18 But taking money out of your retirement accounts before retirement is a terrible idea—penalty or not. And the money you take out of tax-deferred retirement accounts like a traditional 401(k) or IRA will be taxed as ordinary income, so get ready to pay taxes on any withdrawals you make. 
  • If you own a traditional IRA, you have to take money out of your account once you reach a certain age. Those withdrawals are called required minimum distributions (RMDs). The good news is the SECURE Act pushed back the age for RMDs from traditional IRAs from 70 1/2 to 72 (if your 70th birthday was July 1, 2019 or later).19 On top of that, the CARES Act allows seniors to skip RMDs altogether in 2020 without penalty. That’s huge, because it could lead to significant tax savings for retirees with those accounts since the money that’s taken out of a traditional IRA counts as taxable income.
  • The SECURE Act also allows owners of traditional IRAs to keep putting money in their accounts past age 70 1/2 as of 2020.20 Since the money you put into a traditional IRA is tax deductible, you could lower how much of your income is taxed this year. Just remember: You will have to pay taxes on that money whenever you take it out.

One last thing: If you did take some money out of a 401(k) or traditional IRA and you’re facing a huge tax bill, don’t panic! You have three years to put those funds back and get a refund on any taxes you paid on that money.21 And more importantly, it’ll help you get your retirement savings back on track. It’s probably a good idea to reach out to an investment professional who can walk you through the process.

Get Your Taxes Done Right in 2021

If your taxes are pretty straightforward and you want an easy-to-use tax software that can give you some peace of mind, check out Ramsey SmartTax! No hidden fees, no advertisements, no games. That’s how it should be!

But what if you have a more complicated tax situation or had a wild year in 2020? In that case, working with a tax pro is a smart move. And if you’re looking for a trustworthy tax expert in your area, our tax Endorsed Local Providers (ELPs) have years of experience and can help you file your taxes with confidence. Find a tax pro today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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