Tax Law Changes You Need to Know Before Filing in 2021

COVID-19, Meet 2020

With 2020 finally over, that means the tax season to account for it is underway. Just like 2020 itself, this tax season promises to be full of unique considerations – due mainly to the coronavirus pandemic — so it’s important to familiarize yourself with the latest updates to the Internal Revenue Service’s tax code and how they may affect you. In fact, the IRS is pushing the filing deadline back this year. Below we’ve compiled all the major changes to U.S. tax laws you’ll want to take heed of when filing in 2021.

The Deadline Is April 15 This Year — Piotrekswat/istockphoto

Tax Deadline Postponed

The IRS announced that it planned to extend the usual April 15 tax deadline to May 17. "This extension is absolutely necessary to give Americans some needed flexibility in a time of unprecedented crisis,” House Ways and Means Chair Richard Neal and Representative Bill Pascrell, head of the panel’s oversight subcommittee, said in a statement. “While we are pleased with this 30-day extension, we will continue to monitor developments during this hectic filing season.”

The Tax Brackets Are Different — RyanJLane/istockphoto

Tax Brackets Increased

What tax bracket your household income falls under defines what tax rate (or rates) you’ll have to pay. While rates stayed the same for 2020, the tax brackets have increased by a few hundred dollars since 2019 to account for inflation. You can determine at what percentage your income will be taxed this year from an AARP chart.

Standard Deduction Increased

The standard deduction for tax year 2020 also increased relative to inflation, by $200 for single or married taxpayers filing separately, $300 for heads of household, and $400 for married couples filing jointly. Remember, you can also opt for itemizing deductions, which takes more time to calculate but can be worth it if your expenses exceed the standard deduction amount.

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Donate to a Charity — donald_gruener/istockphoto

Bigger Deductions for Charitable Contributions

Under the Coronavirus Aid, Relief, and Economic Security Act, taxpayers no longer have to itemize deductions to write off charitable contributions. This means that even if you take the standard deduction for 2020, you can still also deduct up to $300 in qualified charitable donations. If you do itemize deductions, you can deduct up to 100% of your remaining adjusted gross income based on how much you contributed to charities.

CARES Act Stimulus Check — mphillips007/istockphoto

Disaster Relief Checks

As another stipulation of the CARES Act, millions of Americans got up to $1,200 in aid from the government to compensate for 2020’s pandemic-related shutdowns. These relief packages will not count as taxable income, but will be treated instead as refundable tax credits, like an advance on what would’ve been part of your 2021 refund.

The Medical Expenses Deduction Is Still in Place, for Now — gerenme/istockphoto

Medical Deductions

Under another bill Congress passed in December, Americans can now deduct for 2020 and beyond any out-of-pocket medical expenses that exceed 7.5% of their AGI. This is good news for taxpayers getting a lot of health care last year, provided they itemize deductions to write off their treatment bills.

PPP Loans

Another provision of the CARES Act gave small-business owners Paycheck Protection Program loans to go toward eligible expenses such as payroll, utilities, rent, and mortgage payments. For tax season, these expenditures can be deducted from taxable income, and the loans themselves are made to be forgiven, pending an application and approval by the Small Business Administration.

3.2 Million File Unemployment Claims As Economy Reels From COVID-19 Pandemic — Stephanie Keith / Stringer / Getty Images News / Getty Images North America

Unemployment Benefits

If you’re one of the many Americans who turned to unemployment insurance to soften the pandemic shutdown’s economic impacts, you will need to pay income tax on whatever benefits you got. If you didn’t already have taxes withheld from your benefits upon signing up, you have the option either to pay them all at once upon filing or split them into four installments as quarterly estimated taxes.

Higher Health Savings Opportunities — kate_sept2004/istockphoto

ESA and 529 Plans

Educational Savings Accounts and 529 Plans are tax-free reserves to be spent exclusively on qualified educational expenses. In 2020, newly qualified uses of 529 funds include paying off the costs of apprenticeship programs and up to $10,000 total in student loan debt. But since many schools canceled classes this year, refunded ESA or 529 money must have been placed back in its account within 60 days or spent on educational expenses, or else will be subject to income tax and a withdrawal penalty.

Penalty-Free Retirement Withdrawals

Under the CARES Act, taxpayers under age 59½ were allowed to withdraw up to $100,000 from their 401(k) or IRAs without incurring an early withdrawal penalty. The downside is that money taken out of these tax-deferred retirement accounts prematurely will still then be taxed as ordinary income. You can still score a refund on that tax amount by replacing those emergency withdrawals in the 401(k) or IRA within three years.

Roth IRA Income Limits Have Risen — jygallery/istockphoto

More Time to Deposit in IRAs

Under the Setting Every Community Up for Retirement Enhancement Act of 2019, owners of traditional IRAs can continue depositing money into them past the previous ceiling age of 70½. That means an ongoing chance for seniors to defer paying taxes on whatever income they stashed away in 2020, though those funds will still be taxed upon withdrawal down the road.

Form 1040-SR Makes Filing Easier for Seniors — FG Trade/istockphoto

Deferred Required Minimum Distributions

The IRS mandates taxpayers begin making withdrawals from their preferred retirement accounts at age 72 — what are called required minimum distributions. They count as fully taxable income, but this year the CARES Act suspended mandatory withdrawals so retirees could choose not to access these savings in 2020 and forgo the taxes they would otherwise have had to pay.

Increased Threshold for the Earned Income Tax Credit

A refundable credit eligible to low- and middle-income workers, the Earned Income Tax Credit got a bump in the maximum credit amount available and the income limits eligible to get it. For 2020, taxpayers are eligible if their adjusted gross income is no greater than $50,594 or $56,844 for those who are married and filing jointly. The credit can help save anywhere from $538 to $6,660 on taxes, depending on income and household size.

High-Deductible Health Plan Deferrals

If you have a qualifying high-deductible health insurance plan, the contribution limit for what you can deposit into a Health Savings Accounts increased for tax year 2020 – from $3,500 to $3,550 for one’e self and $7,000 to $7,100 for whole family coverage. High-deductible status now applies for health plans costing at least $1,400 for one’e self or $2,800 for family coverage annually. Similarly, to qualify for a Medical Savings Account in 2020, participants must now have an annual deductible of at least $2,350 for one’e self or $4,750 for family coverage, but not more than $3,550 or $7,100, with maximum out-of-pocket expenses of $4,750 or $8,650, respectively.

State and Local Tax Deductions Are Capped — LIgorko/istockphoto

Qualified Adoption Expenses Credit

Another tax credit that experienced a routine increase in 2020: qualified adoption expenses now max out at $14,300, compared with $14,080 for the 2019 tax year.

ESTATE TAX ESTATE Plan — Pgiam/istockphoto

Estate Tax Exclusion Increase

The estate tax lifetime exclusion amount — defining how much wealth can be passed on to next of kin before being subject to taxes — also rose in 2020. Estates for those who died in 2020 now have a basic tax exclusion amount up to $11.58 million, compared with $11.4 million the year before.

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion prevents Americans making money abroad being taxed twice on their foreign income, up to a certain amount. In another routine adjustment, this exclusion rose to $1,700 for tax year 2020, up to a maximum exemption amount of $107,600.

Max Out 401(K) Contributions — designer491/shutterstock

Saver’s Credit

To incentivize saving for retirement, the saver’s credit gives low- and middle-income earners a tax credit for contributing to their 401(k)s or IRAs. For 2020, as for previous years, the IRS increased the income threshold to qualify for this little-known credit, so it’s now open to single taxpayers with incomes up to $32,500, heads of household up to $48,750, and married couples filing jointly up to $65,000.

W-2 Verification Codes Have Expanded — ShutterstockProfessional/shutterstock

Higher Incomes Subject to Social Security Taxes

For tax year 2020, Social Security payroll taxes will apply to workers’ incomes up to $137,700 before earnings are exempt, up almost $5,000 from 2019.

Forgetting About Taxes — PeopleImages/istockphoto

CARES Act Provisions Not Carrying Over to 2021

One last thing to keep in mind for your 2020 taxes: not all of this year’s changes will carry over to the next. In particular, special provisions of the CARES Act, like the waiver of early withdrawal penalties and RMDs on retirement accounts, are set to expire for 2021, pending any legislation to renew them.