As if everything else didn’t look different in 2020, filing your federal tax return in 2021 will look a little different as well. Tax write offs have changed, and we’ll tell you how.
There are many changes between new laws in effect due to the Coronavirus pandemic and inflation adjustments. Here are some new tax write offs and things that will differ when you file in 2021 compared to the previous year.
Increases in Standard Deduction
The standard deduction is tied to inflation, so it is expected to increase each year. Here are the 2020 standard deductions for each filing status:
- Single: $12,400 (an increase of $400 from 2019)
- Head of household: $18,650 (increased by $300)
- Married filing jointly: $24,800 (increased by $400)
- Married filing separately: $12,400 (increased by $200)
Every other year, only people who itemize deductions are eligible to write off charitable donations. However, the CARES Act includes the ability to deduct up to $300 in monetary contributions made in 2020, even if you take the standard deduction.
Increased Contributions to Retirement Accounts
Base contribution limits have increased slightly from 2019 to 2020 for some retirement accounts. The maximum contribution for 401(k) plans in 2020 was $19,500 – an increase of $500 from 2019. The catch-up contribution limit for taxpayers 50 or older also increased by $500, allowing up to $6,500 more in 401(k) contributions.
The Coronavirus Aid, Relief, and Economic Security Act of 2020, widely known as the CARES Act, included a provision to waive required minimum distributions withdrawn from retirement accounts in 2020.
Ordinarily, RMDs are considered taxable income. However, this one-time provision may help retirees by lowering their 2020 taxable income, which could mean less federal taxes for 2021.
Increased Contributions for HSAs
If you participate in a health savings account, the limit increases from 2019 to 2020. If you have health insurance for just yourself, you could contribute up to $3,550, which is $500 more than 2019. For family coverage, the new amount is $7,100, an increase of $100.
Earned Income Tax Credit Changes
Both the income limits and maximum credit amount improved in 2020. The maximum credit is now $6,660, up from $6,557 in 2019. Adjusted gross income (AGI) amounts have also increased:
- Married filing jointly: $56,844 ($55,952 in 2019)
- Everyone else: $50,594 ($50,162 in 2019)
This could mean some households that didn’t qualify for the EITC in 2019 may be eligible in 2020.
Saver’s Credit Increased Income Limits
Not many people know about the retirement savings contributions tax credit, better known as the saver’s credit. This increased in income limits based on the AGI on your tax return could mean you’re now eligible, even if you weren’t in 2019:
- Head of household: $48,750 (up by $750 in 2019)
- Married filing jointly: $65,000 (up $1,000 in 2019)
- Everyone else: $32,500 (up $500 in 2019)
Educator Expense Deduction
For teachers and instructors of K-12 students, the Consolidated Appropriations Act of 2020 allows educators to get an above-the-line deduction of up to $250 for school-related out-of-pocket expenses. This includes PPE, and fees must have been paid or incurred after March 12, 2020.
Employer Student Loan Payments Tax-Free Treatment
Employees can treat any payments made by their employer towards their student loans through the Section 127 educational assistance plan as tax-free income for the employee.
Employers could pay up to $5,250 per employee between March 28 and December 31, 2020, towards principal and interest with no federal income tax due for the employee. The employer can also deduct the payments made from their federal tax return.
Getting the Most Out of Your Tax Return
Even in a year with no changes, filing a tax return can be time-consuming and confusing. With all the changes 2020 brings, you want to get the most from your tax return. Contact JStevens Accounting in Annapolis today to get valuable accounting strategies and help to maximize your tax return.