2020 brought about many new tax changes as the U.S. government aimed to get aid to people, primarily through tax credits.
With the pandemic still impacting people worldwide, we’ll see even more tax changes in 2021. These changes are generally temporary and aimed at helping people who are struggling financially through the pandemic.
Can you expect extra money in your pocket next year? Most likely, yes. These are the tax code changes you’ll see impacting your 2021 tax return.
Charities, and those who donate, can celebrate. The Consolidated Appropriations Act of 2021 expanded charitable contribution deductions for people who don’t itemize deductions. Usually, only people who itemize their deductions can deduct charitable contributions. But for 2020 and 2021, taxpayers can deduct up to $300 (or $600 if married filing jointly) in cash donations.
And for taxpayers who itemize deductions, there’s also an additional tax benefit for donating to charity. Normally, taxpayers who itemize are limited to only deducting cash donations of up to 60% of their adjusted gross income. For 2020 and 2021, that limit was suspended, and taxpayers who itemize can deduct up to 100% of their adjusted gross income.
If you itemize your deductions, including your medical expenses, deductions can make a big difference in your tax bill. The threshold for claiming medical expenses as a deduction was set to be 10% in 2021, but that has now been lowered to 7.5% permanently. That could mean a big difference in what you’re able to deduct.
For example, if your adjusted gross income was $100,000 in a year, a 10% threshold would mean that you could claim any medical expenses that exceed $10,000. With a 7.5% threshold, you can now deduct any medical expenses that exceed $7,500. If you have $12,000 in medical costs in 2021, you’ll now be able to take a $4,500 deduction rather than a $2,000 deduction.
Deductions for Business Meals
Self-employed or small business owner? You’re going to want to go out to eat. Usually, business meals are only 50% deductible. So if you have a bill for $100, you can generally write off $50 of it.
For 2021 and 2022, those business meals are 100% deductible. Why? The idea is this additional deduction can help revive the struggling restaurant industry.
Expanded Lifetime Learning Credit
The Lifetime Learning Credit is a tax credit for tuition and related expenses. The maximum tax credit is $2,000 (20% of the first $10,000 of qualified expenses). It usually begins to phase out at $59,000 for single filers or $118,000 for married filing jointly.
The phaseout level is being increased in 2021 and will now begin at $80,000 for single filers and $160,000 for joint filers.
Elimination of Tuition Deduction
Not all tax deductions and credits are getting an expansion in 2021. The temporary deduction for tuition and fees is being eliminated. This deduction allowed taxpayers to deduct up to $4,000 to cover higher education costs for themselves or their dependent children. But you weren’t able to claim both the tuition deduction and the Lifetime Learning Credit, and most taxpayers will benefit more from the Lifetime Learning Credit.
Earned Income Tax Credit
The Earned Income Tax Credit is increasing for 2021. This is a tax credit aimed at helping low and moderate-income families reduce their tax liability.
The maximum benefit for someone who has no qualified children is nearly tripling — increasing from $543 to $1,502. The age limits have changed as well, and now the minimum age limit has been decreased to 19 while the maximum age limit of 65 has been eliminated.
Child Tax Credit
Families with children get a considerable boost with the Child Tax Credit increase for 2021. The maximum credit is increased from $2,000 to $3,000 for children age 6-17 and $3,600 for kids under the age of six.
The qualifying income limits have also changed. The qualify for the full Child Tax Credit, the income thresholds are:
- $75,000 for single filers
- $112,500 for head of household filers
- $150,000 for married filing jointly
Another feature of this tax credit that’s new for 2021 is that half of the tax credit will be received during 2021, and the other half will be received when 2021 taxes are filed. Want to know more? We have full details on the 2021 Child Tax Credit.
Child and Dependent Care Tax Credit
Another benefit for families is the increased Child and Dependent Care Tax Credit. This tax credit allows taxpayers to receive a tax credit to help offset the cost of care for their qualified children or dependents. In 2020, families could receive a credit for between 20% and 35% of childcare costs of up to $3,000 for one dependent or up to $6,000 for multiple dependents.
2021 tax year brings about some changes. First, it makes the tax credit refundable, which means that you can utilize the entire tax credit even if your tax liability is less than the amount of the credit.
Second, it increases the amount of the credit. Instead of families being able to get a credit for 20% - 35% of childcare costs of $3,000 for one dependent and $6,000 for multiple dependents, families can now receive a credit up to 50% of up to $8,000 in care expenses for one dependent and $16,000 in care expenses for multiple dependents.
Dependent Care FSA
A flexible spending account (FSA) allows workers to set aside pre-tax money to pay for things like medical care or childcare expenses. In 2021, the limit you’re allowed to set aside in a dependent care FSA is receiving a big boost.
In 2020, you could contribute $2,500 to a dependent care FSA if you were single or $5,000 if you were married and filing jointly. In 2021 that limit raises to $5,250 for single filers or $10,500 for married couples filing jointly.
Not everyone has access to a dependent care FSA through their workplace, but if you do, this could be a notable boost to your 2021 tax savings.
We’re not even halfway into 2021, and we’ve seen a lot of significant tax changes. It can be a challenge to keep them all straight. If you need help making sense of them all or making sure you’re taking advantage of everything available to you, Taxfyle can help.