Nobody looks forward to tax season. That is why most of us just file all our important documents when they are due and then put the whole thing out of mind until it is time to do it again next year.
But that method can lead to some bad surprises regarding what regulations have changed.
While you can’t avoid new tax changes, you can certainly prepare for them if you know about them beforehand. Courtesy of Kiplinger, here are some of the most significant changes to be aware of for this tax year.
The first bit of bad news is that the American Rescue Plan Act will no longer be applicable for unemployment this year. This made up to $10,200 of unemployment benefits free of taxation in 2020. However, in 2021, your money from unemployment is now taxable again.
Tax Bracket Ranges
There is a possibility you may find you fall into a different tax bracket this year. For 2021, the tax brackets are going to be wider than what we had seen in 2020, though President Biden’s ultimate plan is for this to primarily affect those at the wealthier income levels.
One change seniors saw in 2020 was the choice to opt-out of required minimum distributions. That will not be a choice for this year, and anyone who is 72 or older will have to do a mandatory RMD for the 2021 tax year.
Child Tax Credit
Parents will be glad to hear this is one area they will be receiving relief on their taxes this year. Acknowledging the difficulties in childcare during Covid, this credit is being raised from $2,000 to as much as $3,600 for children 5 and under.
Child and Dependent Care Tax Credit
With the pandemic requiring parents to scramble to care for children who might be home virtual while the parents are in the office, this tax credit has been increased since 2020. In 2020, the maximum credit allowance was 35%, but this year it will be 50% and more of your costs can also be applied towards that percentage.
Earned Income Tax Credit
In some pleasant news, the number of people eligible to receive the earned income tax credit this year will include more individuals, which could benefit you. And the maximum credit you are able to receive has also been significantly raised, going from $543 to $1,502.
Recovery Rebate Credit
This is an advantage for those who were eligible to get the third stimulus check, but for whatever reason did not wind up receiving it. In essence, the 2021 taxes will ask for your rebate credit, and if the amount you received from the stimulus is less than what you were entitled to, that will then either be deducted from the taxes you owe or even given to you as a refund.
Long-Term Capital Gains Tax Rates
If you hold capital assets then the good news for you is that 2021 brings no changes from last year’s tax rate. However, one new consideration is that inflation has altered the brackets a bit, such as changing the applicability of the 0% rate from those making $40,000 to $40,400.
Charitable Gift Deductions
This change is actually a positive one, as last year married couples were only able to deduct a $300 cash contribution as a deduction. However, since that is the same amount given to individuals, this year married couples will each be able to do so, for a total of $600.
The changes here are nothing that radical and are really just taking inflation into consideration. Individuals now get a deduction of $18,800, which is a $150 increase from 2020. And married couples will see a $300 increase for a new deductible of $25,100.
In addition to the above, Fred Hubler Chief Wealth Strategist for Creative Capital Wealth Management Group states, “before the end of the year, if you have capital gains in the stock market (or any other source) and you are an accredited investor, you can sell that appreciated asset and defer and reduce the gains you would need to pay by moving the gains into a qualified opportunity fund.”
Hubler also likes to work with his clients during the year to make strategic investments in tax credit investments that reduce taxable income. “Taxes are a year-round item,’ says Hubler, “not just something you deal with at the end of the year.”
As you can see, not all the tax changes this year are bad, and some will be quite welcome for struggling families. But knowing these differences, both good and bad, is what will help you build a solid financial plan.
To read the full list of changes you can expect for this year’s taxes, reader Kiplinger’s article by clicking here.
Want to know if you’re on the right path financially? Fred Hubler’s Second Opinion Service (SOS) is a no-obligation review with Creative Capital Wealth Management Group‘s Chief Wealth Strategist.
It’s simply not possible to get a reliable second opinion from the same person who gave you the first one. Click here to schedule an SOS meeting with Fred and his team.