Tax law changes all the time. Each year has something new to learn about how much you owe, how much you can save, and what impact the new law will have on your financial life.

That’s why we prepared this guide to IRS tax changes for 2021. Don’t put off planning this year while waiting to file for last year.

Without further ado, here’s what you can expect this year.

Higher Standard Deductions

Taking the standard deduction greatly simplifies tax preparation. These days, itemizing probably won’t get you a better deal, so you may as well embrace it.

Here is the new standard deduction and the change from last year.

• Single - $12,5550 (up $150)
• Married Filing Jointly - $25,100 (up $300)
• Head of Household - $18,800 (up $150)
• Married Filing Separately - $12,5550 (up $150)

Beyond that, those who are 65 and older or blind get extra. Marrieds get $1,350 while singles get $1,700, $50 more than in 2020 on both counts. 

If you are 65 or older and blind, you qualify for double the amount. Joint filers provide each spouse a chance at these deductions. To put that all together, if both spouses are over 65 and both are blind, their standard deduction would increase by $5,400. The total deduction would then come to $30,500 ($25,100 + $5,400).

Alas, there is no change to the deduction for minor children. It remains at $1,100 unless they have more than $750 in work income.

Changes to Key Provisions for Some Tax Credits

What’s not to love about tax credits? Tax credits reduce your taxes dollar for dollar. They’re better than deductions! 

There have been a few changes here, too. 

The Earned Income Tax Credit provides substantial reductions for low and mid-level income earners. How much depends on family size and income, but the maximum is $6,728 for families with three or more children. That’s an extra $68 more than 2020 for those who file single, head of household, or widowed and have an income of $51,464 or less.

For other family sizes:

• Two children - $5,980 (up $60), income limit $47,915
• One child - $3,618 (up $34), income limit $42,158
• No children - $543 (up $5), income limit $15,980

If you are married and filing jointly, the income limit goes up by $5,950 for each family size. Even better, if you don’t owe any taxes, you still get the credit back from Uncle Sam as a refund.

The Saver’s Credit pays up to $1,000 per person to encourage retirement contributions. It’s also meant for low to mid-level income taxpayers. Depending on income, you can get credit for saving 10%, 20%, or 50% of up to $2,000 in contributions to a 401(k), IRA, or similar retirement account.

Income limitations are up slightly from last year.

The Lifelong Learning Tax Credit credits 20% on up to $10,000 in eligible learning expenses for taxpayers earning less than $59,000 if single or %119,000 for filing jointly. The credit shrinks with higher incomes. Past $59,000 for singles or $139,000 for joint filers, there is no credit provided.

Income Thresholds for Retirement Accounts

Contribution limits don’t change from 2020. For IRAs, those under 50 are limited to $6,000; over 50, your limit is $7,000. 401(k) contribution limits remain at $19,500 and $26,000 respectively for those under 50 and over 50.

Income limits, on the other hand, have gone up. While those limits only impact whether you can deduct contributions to a traditional IRA or make contributions for a Roth IRA, there has been some change. You are eligible for a full contribution or deduction amount below phase-out if you have an employer-sponsored retirement account.

• Filing Single - Roth phase out range is $125,000 to $140,000 and Traditional phase out range is $66,000 to $7,600.
• Married Filing Jointly - Roth phase-out range is $198,000 to $208,000 and Traditional phase-out range is $105,000 to $125,000.
• Married Filing Separately - Roth and Traditional phase-out range is $0 to $10,000.

A caveat: If your spouse has an employer-sponsored retirement account, the phase-out range for both Roth and Traditional IRA is the same.

Changes in Tax-Favored Accounts

Do you have high-deductible health insurance? You can set aside money for future healthcare costs. Of course, there are limits.

• For self-only policies, you can contribute up to $3,600 to an HSA. The minimum annual deductible must be at least $1,400.
• For family policies, you can contribute up to $7,200 to an HSA, but the minimum annual deductible must be at least $2,800.
• For 55 and older, you can make catch-up contributions of $1,000, but your maximum out of pocket expenses must be $7,000 or $14,000 respectively for self-only and family policies.

Changes for Estate Taxes 

Estate taxes take all the fun out of dying, but now you can pass on $11.7 million to your heirs in 2021 without paying taxes. It’s up $120,000 from 2020, so there’s that.

The annual gift tax exclusion amount is up to $15,000 to as many recipients as you want for 2021. It’s the same as 2020, as is the write-off for charity. 

At least in 2020, the IRS made it easier to get a deduction for charity. You no longer have to itemize to get it as long as it’s less than $300 and given to a qualified charitable organization.

New Tax Brackets

You know the federal government can’t stop messing with the tax brackets. How much you owe depends on how much you earn within specified brackets. The bracket for filing Single is different from Head of Household is different from married filing jointly.

Your best bet is to consult the 2021 tax tables to see which of the seven (that’s right, seven) tax brackets you fit into. 

Tax Cuts and Jobs Act Impact for 2021

First of all, there is no “stealth tax increase” for lower and middle-income taxpayers due to the Tax Cuts and Jobs Act (TCJA). Not exactly. There’s a lot of nuances there.

For context, recall that the TCJA reduced the Affordable Care Act (ACA or Obamacare) individual mandate to zero. Now there is no incentive to purchase qualified insurance and get premium tax credits for doing so, especially if you’re low-income. It makes it look like a tax increase in the distribution tables.

So, yeah, the Tax Foundation says this makes the increased taxes due to voluntary decisions you made about whether to purchase qualified insurance. So, no, it isn’t a stealth tax increase exactly, but if you didn't remember the part about purchasing qualified health insurance, you might be taken by surprise.

BTW, the TCJA's individual income tax provisions expire at the end of 2025, with tax increases phasing in over the next four years. The higher Child Tax Credit will see some shrinkage while individual income tax rates start to go up.

Final Thoughts…

That’s a lot to take in, isn’t it? If you need help parsing the federal tax code, give Top Tax Defenders a call. Translating tax-speak is kind of our superpower.