Largely due to COVID-19 and the related bills passed by Congress, 2020 brought with it notable tax changes. In this article, we will go over the main changes for the 2021 tax season—from tax bracket inflation adjustments to changes in tax law—that impact a large percentage of Americans.
As accounting professionals know, the start date for the 2021 tax season was moved back by the IRS to Friday, February 12, 2021.
Please note that this list is not comprehensive and not intended to be used as tax advice. For a complete overview of adjustments and regulations, you should check out the IRS website.
Standard, Yearly 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 statuses are outlined by the IRS here.
Adjusted standard deduction
For single taxpayers and those married filing separately, the standard deduction notably increased by $200, for a total of $12,400. For taxpayers who are married and filing jointly, it also increased by $400 to $24,800, and for heads of households, it increased by $300 to $18,650.
Note that for taxpayers who are 65 years old or older, the standard deduction amounts have been increased as well:
Covid-19 Relief
Recovery Rebate Credit
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, eligible taxpayers can claim the Recovery Rebate Credit. The claim must be made on Form 1040 or Form 1040-SR, and to qualify taxpayers must fall into one of the below categories:
Accordingly, taxpayers who received the correct amount do not need to fill out any information about the Recovery Rebate Credit on their Form 1040. Note that the money received under the CARES Act is not taxable.
PPP loan forgiveness
Paycheck Protection Program (PPP) loans—a Covid relief loan program— may be fully or partially forgiven by the IRS, depending on how a business spent these funds. A borrower can apply for forgiveness at any time up to the maturity date of the loan and once all loan proceeds have been used.
However, if a borrower does not apply for forgiveness within 10 months after the last day of the covered period, then payments are no longer deferred, and borrowers will need to start paying back the loan.
Loan forgiveness amounts are not taxable, and under the COVID-19 Relief bill, PPP-funded expenses are even tax-deductible.
Changes to tax credits and deductions
Charitable contributions
Under the CARES Act, the 60%-of-AGI limitation has been lifted for cash donations for taxpayers who itemize, and right now everything can be deducted. As a reminder, donations to donor-advised funds and private, non-operating foundations do not qualify. The IRS outlines which organizations do qualify.
Taxpayers who select the standard deduction will be able to take a new “above-the-line” deduction for $300 of cash donations. For corporations, the taxable income limit on cash charitable contributions is increased from 10% to 25%.
Solar energy
The residential solar energy tax credit is 26% for 2020, 2021, and 2022 and will drop down to 22% for 2023.
Pass-through income deduction
In 2020, the taxable income threshold amounts for the pass-through income deduction were increased: individuals, $163,300, and joint filers, $326,600.
Interest payments
After filing their 2019 tax returns, 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 in 2020 federal income tax returns.
Taxpayers who received at least $10 in interest should have received Form 1099-INT in January 2021.
Retirement plan changes
The CARES Act and the SECURE Act also brought changes to retirement plans for tax year 2020. These include:
Increased contribution limits
The employee contribution limit for workplace retirement plans has been increased to $19,500. For workers who are 50 years old or older, the catch-up contribution limit is now $6,500, and for SIMPLE retirement accounts, the contribution limit changed to $13,500.
Early withdrawal penalties waived
Taxpayers financially impacted by Coronavirus can withdraw up to $100,000 from IRAs, workplace retirement plans, and personal retirement accounts without being subjected to the early withdrawal penalty of 10%. However distributions are still taxable but can be spread over three years.
Additionally, taxpayers can now withdraw up to $5,000 per spouse for birth or adoption-related expenses without incurring the early withdrawal penalty.
Raised required minimum distribution age
The age at which someone has to start taking required minimum distributions (RMD) from employer-sponsored retirement plans has been raised from 70 ½ years old to 72. For 2020 however, RMDs are not required.
No maximum age for traditional IRA contributions
Previously, individuals over the age of 70 ½ were unable to contribute to traditional IRAs. There is now no limit.
Retirement plan loan changes
Loan limits from qualified retirement plans between March 27, 2020 and September, 23, 2020 may be increased to the lesser of the following for taxpayers impacted by COVID-19:
Plus, instead of five years, taxpayers now have now six years to repay the loan.
Restored rules for Kiddie tax
The changes to the Kiddie tax made under the Tax Cuts and Jobs Act of 2017 have now been repealed and are returning to the pre-2018 situation. Children who are 18 years old or younger, or up to 24 years old for students— and whose total unearned income is more than $2,200— will be taxed at their parent’s tax rate.
Taxpayers can also elect to have the restored rules applied to them for their 2018 and 2019 tax returns by filing an amended tax return.
Spanish IRS forms
The following forms are now available in Spanish:
Taxpayers who prefer to receive IRS communications in Spanish can fill out Schedule LEP, Request for Change in Language Preference.
