KNOW THE CHANGES FOR YOUR 2021 TAX RETURNBy MARY LYNNE DAHL , Certified Financial Planner ™ Retired
December 24, 2021
(SitNews) Ketchikan, Alaska - Some things have changed that will impact your 2021 income tax return. It is a good idea to become familiar with the changes so that you can gather the data you will need to file your 2021 income tax on time and correctly. So, with that in mind, here is a list of some of the most notable changes:
Tax brackets have change. For single taxpayers, the lowest tax bracket of 10% is on taxable income of up to $9,950 then moves upward to 12% on income of up to $40,525, then 22% on income of up to $86,375 then up to 24% on income up to $164,925 then up to 32% on income up to $523,600 and tops out on income of more than $523,600.
For married couples filing jointly and qualifying widows/widowers, the lowest bracket of 10% is on taxable income of up to $19,900, then moves upward to 12% on income up to $81,050 then 22% on income up to $172,750 then 24% on income up to $329,850 then 32% on income up to$ 418,850 then 35% on income up to $628,300 and tops out at 37% on income of more than $628,300.
The standard deduction has changed. For tax year returns, the 2021 standard deduction is now $12,550 for single taxpayers and $18,800 for married filing separately. For married couples filing jointly it is $25,100 and for single head of household filers it is $18,800. These changes are increases in the standard deduction.
Because the itemized deduction has not changed, for most taxpayers, the standard deduction is more than they would generally be able to take than if they itemized their deductions, including charitable gifts, so most taxpayers will end up taking the standard deduction, as in the past few years. For example, the mortgage tax deduction is limited to $750,000 and real estate tax deductions are limited to $10,000. Medical deductions are limited to 7.5% of adjusted gross income (AGI) as in the past and charitable deductions are limited to 100% of AGI, none of which are changes from 2020. Finally, itemized miscellaneous deductions are not allowed at all.
Another change that has been made is that the child tax credit is now $3,000 for children ages 6-17 and is $3,600 for children under age 6. These amounts are for taxpayers with incomes of less than $75,000 for single taxpayers and $150,000 for married taxpayers filing jointly. For taxpayers with incomes over those amounts and up to $200,000 for single households and $400,000 for joint filers, the child tax credit is $2,000. Keep in mind that a tax credit is more valuable than a tax deduction because it goes against your actual tax owed; it does not reduce your taxable income which only reduces a portion of your actual tax owed.
For people age 72 or older, the 10% penalty that was waived last year on failure to take the required minimum distribution has been reinstated. This change may get overlooked by some people who file their own 2021 tax returns without professional help, so take notice to make sure you restart taking your RMDs as in years prior to last year if you are required to take the distributions. If this will be your first distribution, you have until April 1 of 2022 to take it, but if it is not your first distribution, it is due by calendar year end annually.
An important change for many people is that the maximum contribution you can make to a Health Savings Account (HSA), if you have one, has increased to $3,600 for individual taxpayers and $7,200 for families of taxpayers under age 55, and for taxpayers over 55 the contribution allows a catch-up provision of an extra $1,000 to be made, which is $4,600 for individuals and $8,200 for families.
Finally, the estate tax rule has changed significantly. It is now the rule that estates of less than $11,700,000 are exempt from death taxes. This may change in coming years since the exemption is scheduled to expire in 2025, which would likely reduce the taxable exemption to 50% of that amount.
Tax rules can be pretty complicated, so if your tax return is not simple, it is probably in your best interest to hire a paid professional to figure yours out and prepare it for you. This requires that you keep records of income, expenses, contributions and any financial data that could be important to filing correctly. Penalties for mistakes are costly and the IRS generally does not show compassion for failures to pay the correct amount on a timely basis simply because a tax payer claims ignorance or some personal problem. It is often less expensive to hire a professional to prepare your tax return than make a mistake that will cost more in penalties and interest than the price of the professional. Be smart and get it right rather than penny wise and pound foolish.
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