Largely due to COVID-19 and the related bills passed by Congress, 2020 brought notable tax changes. In this article, we’re going to outline the key changes for the 2021 tax season – from inflation adjustments in the tax bracket to changes in tax law – that will affect a large percentage of Americans.
As accountants know, the start date for the 2021 tax season has been postponed by the IRS to Friday, February 12, 2021.
Please note that this list is not exhaustive and should not be used as tax advice. A full overview of adjustments and regulations can be found on the IRS website.
Standard annual updates
Tax rates and brackets
There are seven tax brackets for 2020: 10%, 12%, 22%, 24%, 32%, 35% and 37%, which are adjusted for inflation, and the tax owed for different filing status is described by the IRS here.
Adjusted standard trigger
For individual taxpayers and those married separately, the standard deduction increased noticeably by $ 200 to a total of $ 12,400. It also increased by $ 400 to $ 24,800 for taxpayers who are married and filing together, and by $ 300 to $ 18,650 for householders.
Note that for taxpayers aged 65 or over, the standard withholding amounts have also been increased:
- For single and household heads, the standard allowance increases by $ 1,650.
- For those who are married together, the standard deduction increases by $ 1,300 (if one spouse is 65 or older) and $ 2,600 (if both spouses are 65 or older).
Recovery Discount Credit
Under the CARES (Coronavirus Aid, Relief and Economic Security) law, eligible taxpayers can apply for Recovery Rebate Credit. The claim must be made on Form 1040 or Form 1040-SR, and to qualify taxpayers, it must fall into one of the following categories:
- When the taxpayer was eligible for an economic impact payment in 2020 but did not receive it
- They received only part of the payment due to them: typically $ 1,200 for individual applicants and $ 2,400 for those who are married and file together
- They did not receive $ 500 per qualified child
Accordingly, taxpayers who have received the correct amount will not need to fill out any information about the refund balance on their Form 1040. Note that the money received under the CARES law is not taxable.
Granting of PPP Loans
Paycheck Protection Program (PPP) loans – a Covid aid program – may be granted in whole or in part by the IRS, depending on how a company spent those funds. A borrower can apply for forgiveness at any time up to the loan maturity date and after all loan proceeds have been used.
However, if a borrower fails to apply for forgiveness within 10 months of the last day of the covered period, payments will no longer be deferred and borrowers must begin repaying the loan.
Loan amounts are not taxable, and according to the COVID-19 relief bill, PPP-financed expenses are even tax-deductible.
Changes to tax credits and deductions
Under the CARES Act, the 60% AGI limit on cash donations has been lifted for taxpayers who make a listing, and for now everything is deductible. As a reminder, donations to funds advised by donors and private, non-functioning foundations are not eligible. The IRS describes which organizations qualify.
Taxpayers who select the standard deduction can make a new deduction for $ 300 in monetary donations. For companies, the taxable income limit for donations in cash will be increased from 10% to 25%.
The household solar energy tax credit is 26% for 2020, 2021 and 2022 and will decrease to 22% for 2023.
Pass-through income deduction
In 2020, the taxable income thresholds for pass-through income withholding were increased: individuals ($ 163,300) and joint applicants ($ 326,600).
After filing the tax return for 2019, a taxpayer could have received an interest payment in addition to a refund. This payment is sent separately from the refund and is taxable: it should be reported on the 2020 federal income tax return.
Taxpayers who have received $ 10 or more in interest should have received Form 1099-INT by January 2021.
Changes to the pension plan
The CARES law and the SECURE law have also brought changes to the pension plans for the 2020 tax year. This includes:
Increased contribution limits
The employee contribution limit for company retirement plans has been increased to $ 19,500. For employees 50 years or older, the catch-up contribution limit is now $ 6,500, and for SIMPLE retirement accounts, the contribution limit has been changed to $ 13,500.
|Type of pension plan||Contribution limit|
|401 (k)||$ 19,500|
|403 (b)||$ 19,500|
|457 (most)||$ 19,500|
|Thrift plan||$ 19,500|
There are no early withdrawal penalties
Taxpayers financially affected by coronavirus can withdraw up to $ 100,000 from IRAs, company retirement plans, and personal retirement accounts without the 10% early withdrawal penalty. However, distributions are still taxable, but can be spread over three years.
In addition, taxpayers can now withdraw up to $ 5,000 per spouse for childbirth or adoption costs with no early withdrawal penalty.
Increased minimum age of distribution
The age at which someone must begin making the Minimum Payout (RMD) required from employer-sponsored retirement plans has been increased from 70 ½ years to 72 years. However, RMDs are not required for 2020.
No maximum age limit for traditional IRA contributions
Previously, people over 70 ½ years of age could not contribute to traditional IRAs. There is no limit now.
Changes to the pension plan loan
Qualifying pension plan credit limits between March 27, 2020 and September 23, 2020 may be increased to the lower of the following for taxpayers affected by COVID-19:
- $ 100,000 less any outstanding loans
- Vested benefit under the plan
Taxpayers now have six years to repay the loan instead of five years.
Restored rules for the kiddie tax
The changes to the kiddie tax made under the Tax Cuts and Employment Act 2017 have now been repealed and revert to the pre-2018 situation. Children aged 18 or under, or for students up to 24 years old, with total unearned income greater than US $ 2,200, will be taxed at their parents’ tax rate.
Taxpayers can also choose to have the restored rules applied to their 2018 and 2019 tax returns by filing an amended tax return.
Spanish IRS forms
The following forms are now available in Spanish:
- Form 1040
- Form 1040-SR
- Form 1040 and 1040-SR instructions
- Schedules 1, 2 and 3
Taxpayers who prefer IRS communications in Spanish can complete the LEP (Language Preference Request) schedule.
Author: Davis Bell
Davis Bell is the CEO of Canopy, a leading cloud-based practice management platform for accountants. Davis joined Canopy in 2019 and has held key strategic, operational, and financial leadership roles. He specializes in creating and managing new products and businesses from scratch. … Show complete profile >