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TAXES:  INFLATION ADJUSTMENTS, DEDUCTION LIMITS, AND OPTIMIZATION TIPS

TAXES: INFLATION ADJUSTMENTS, DEDUCTION LIMITS, AND OPTIMIZATION TIPS

| December 10, 2020
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TAX INFLATION ADJUSTMENTS 1

The Internal Revenue Service today announced the tax year 2021 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes.

The tax year 2021 adjustments described below generally apply to tax returns filed in 2022.

The tax items for tax year 2021 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
  • Marginal Rates: For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:
    • 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
    • 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
    • 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
    • 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
    • 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
    • The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly). 
  • The tax year 2021 maximum Earned Income Credit amount is $6,728 for qualifying taxpayers who have three or more qualifying children, up from a total of $6,660 for tax year 2020. The revenue procedure contains a table providing maximum Earned Income Credit amount for other categories, income thresholds and phase-outs.
  • For tax year 2021, the foreign earned income exclusion is $108,700 up from $107,600 for tax year 2020.
  • Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000, up from a total of $11,580,000 for estates of decedents who died in 2020.
  • The maximum credit allowed for adoptions for tax year 2021 is the amount of qualified adoption expenses up to $14,440, up from $14,300 for 2020.

 

Read the full list of tax adjustments for 2021 at the IRS website.

 

TAX BREAKS 2

The tax law changed and you may not be aware of all the tax breaks you are eligible to receive. Some standard deductions continue to climb in 2021 by $150 to $12,550 for single taxpayers and married individuals filing separately, up $300; $18,800 for heads of households, up $150; and $25,100 for married couples filing jointly and surviving spouses, up $300 from the prior year.

While the large increase in the standard tax deduction will allow for many Americans to forgo the task of itemizing their deductions, there are still some ‘above-the-line’ deductions you may want to claim. Most of these have no income limits so everyone is able to claim them.

  • School Teachers Expenses: For 2021, qualifying teachers can claim $250 for expenses paid or incurred for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used in the classroom.
  • Student Loan Interest: For 2021, the $2,500 deduction for interest paid on student loans begins to phase out when modified adjusted gross income (MAGI) hits $70,000 ($140,000 for taxpayers filing a joint return) and is completely phased out when MAGI hit $85,000 ($170,000 for taxpayers filing a joint return).
  • Job Expenses: Miscellaneous deductions, including unreimbursed employee expenses and tax preparation expenses, which exceed 2% of your AGI have been eliminated. That includes the home office deduction.
  • Medical Savings Account (MSA): For 2021, a high-deductible health plan (HDHP) is one that, for participants who have self-only coverage in an MSA, has an annual deductible that is not less than $2,400 but not more than $3,600; for self-only coverage, the maximum out-of-pocket expense amount is $4,800. For 2021, HDHP means, for participants with family coverage, an annual deductible that is not less than $4,800 but not more than $7,100; for family coverage, the maximum out-of-pocket expense limit is $8,750.
  • Charitable Donations: The percentage limit for charitable cash donations to public charities will remain at 60% for 2021.
     

 

RETIREMENT PLAN LIMITS

Retirement plan contributions are tax deductible. By putting money aside in a tax advantaged retirement account, you are saving for your future and also reducing your taxable income. And remember, you have until April 15, 2021 to make your 2020 IRA plan contributions!

ROTH PLANS

For Roth accounts, you can only contribute to them if you make less than a certain amount of money. This salary amount was increased for 2021. Note that your contributions may be phased out at certain income levels so it is best to speak with your financial or tax advisor about your specific situation.

 

YEAR-END TAX OPTIMIZATION TIPS

With the winter holidays just around the corner, the clock is ticking for taxpayers who want to minimize what they will pay next spring. Many money-saving tax strategies need to be implemented by December 31st to have an effect on tax filing in the spring.3

If you’re looking for ways to increase your savings and minimize the amount of federal income tax you'll pay for 2020, talk to your tax professional about implementing some or all of these savings and tax strategies:

  • Make 401(k) and HSA contributions
  • Cancel your RMD for 2020
  • Convert money from a Traditional to a Roth IRA
  • Take a hardship withdrawal, if needed
  • Hold off on mutual fund purchases
  • Harvest your capital losses
  • Pick up capital gains if you're in a low tax bracket
  • Make purchases for your business
  • Bunch your charitable contributions

 

We know that proper tax planning is unique to every individual, and one strategy may not work for all. Our tax preparation services can help you optimizing your taxes. Our certified tax preparer can not only help guide you through tax law changes, but can also make sure you aren't missing any deductions or credits.

The Tax Team provides the following services:

  • e-file
  • Same day filing services
  • 1040, 1040EZ, 1040x, Schedule A, C, & D
  • Federal & State tax return preparation

 

Even if you didn't make all these money moves by December 31st for your 2020 taxes, you can start preparing to optimize your savings and taxes in 2021.

CONTACT our tax specialist today to get started tackling your taxes.

SOURCES:

  1. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021
  2. https://www.forbes.com/sites/kellyphillipserb/2020/10/26/irs-releases-2021-tax-rates-standard-deduction-amounts-and-more/
  3. https://money.usnews.com/money/personal-finance/taxes/articles/10-year-end-tax-tips
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