The 2020 tax year was wild. Pandemic relief bills brought a slew of changes, and filing for the 2021 tax year doesn’t look like it’s going to be much easier.
Some temporary tax provisions for the 2020 tax year were extended through 2021, while others were not. Then there’s all the usual updates to tax brackets, standard deductions and more.
It’s hard to keep everything straight, though good tax software can make an enormous difference.
To help you out, here are seven tax changes you need to be aware of when you file in 2022.
1. No punishment for student loan help
If your student loans have been forgiven, canceled or discharged in 2021, you’re doubly lucky.
In the past, student loan forgiveness was considered taxable income. So if the government forgave thousands of dollars of your student debt, the IRS would treat you like you got a big raise — and hand you a hefty tax bill to match.
As part of the COVID relief bill signed in March, this is no longer the case. Starting in 2021, loan cancellation for post-secondary education is no longer considered taxable income. This tax perk is expected to last through 2025, and it may become permanent.
And if your employer helped you pay down your student debt faster, you can exclude up to $5,250 of that money. This is another temporary benefit that started in the 2020 tax year and has been extended through 2025.
2. Higher deductions for medical expenses
Affordable health insurance is hard to come by, and lower-quality plans can still leave you with hefty out-of-pocket costs.
Thankfully, unreimbursed medical expenses that exceed a certain percentage of your income are tax deductible.
That percentage, called the “floor,” has bounced between 7.5% and 10% of your adjusted gross income (AGI) for the past several years. For your 2021 taxes, it’s back down to 7.5% of your AGI.
That means if your AGI is $100,000, you can deduct unreimbursed medical expenses that exceed $7,500.
However, in order to qualify, you need to itemize your deductions.
3. A boosted child tax credit
In 2020, eligible taxpayers could claim a $2,000 credit per child 16 years old or under. These credits were partially refundable, meaning the government sent refund checks of up to $1,400 per child for low-income filers with at least $2,500 of earned income.
That’s nice, but the credit got a lot sweeter during the 2021 tax season.
The government increased the credit to a maximum of $3,000 per child 17 and under, and $3,600 for children five and under. These credits are fully reimbursable, with no $2,500 earned income requirement — great news if you have a low tax burden.
Eligibility rules have also changed. To receive the maximum credit, your AGI must be under:
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$75,000 for single filers
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$112,500 for head-of-household filers
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$150,000 for married couples filing jointly
If your earnings pass those thresholds, the credit starts to phase out.
The government has been making advance payments on half the credit, starting July 15 and ending Dec. 15. You can claim the other half on your 2021 tax return.
And if you didn’t receive advance payments that you were eligible for, you can square it all up at tax time.
4. Higher standard deductions
When you pay taxes, you can either take the standard deduction to reduce your tax bill or dive into the details and itemize your deductions.
For the 2021 tax year, the standard deduction is getting bumped up to:
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$12,550 for single filers and married couples filing separately (up $150 from 2020).
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$18,800 for heads of households (up $150 from 2020).
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$25,100 for married couples filing jointly (up $300 from 2020).
If you’re age 65 or older, you can tack on an extra $1,350 per person if married and filing jointly or an extra $1,700 for household heads and single filers.
Keep in mind, if you take the standard deduction, you miss out on certain individual deductions, such as the unreimbursed medical expenses mentioned earlier. But ever since the standard deduction nearly doubled back in 2017, it’s still the best option for many taxpayers.
5. Updated income brackets
Tax rates remain unchanged for 2021, but the brackets themselves expanded to account for inflation.
Not today’s runaway inflation, mind you. While rising prices have economists worried — inflation hit a 31-year high in October 2021 — the brackets and standard deduction for the 2021 tax year were locked in back in 2020.
The 2021 tax brackets are:
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37% for incomes over $523,600 ($628,300 for married couples filing jointly).
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35%, for incomes over $209,425 ($418,850 for married couples filing jointly).
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32% for incomes over $164,925 ($329,850 for married couples filing jointly).
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24% for incomes over $86,375 ($172,750 for married couples filing jointly).
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22% for incomes over $40,525 ($81,050 for married couples filing jointly).
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12% for incomes over $9,950 ($19,900 for married couples filing jointly).
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10% for incomes of $9,950 or less ($19,900 for married couples filing jointly).
6. Required minimum distributions are back
Once you reach age 72, the IRS says you must start withdrawing money annually from tax-advantaged retirement accounts, including traditional IRAs and 401(k)s.
These required minimum distributions, or RMDs, count as fully taxable income; the withdrawals help ensure that people don’t use retirement accounts to avoid taxes.
The Coronavirus Aid, Relief and Economic Security (CARES) Act paused these forced withdrawals for 2020, but RMDs are back for 2021.
Seniors who will be at least 72 years old by the end of 2021 must take their RMDs from their tax-advantaged retirement accounts (excluding Roth IRAs) by Dec. 31, 2021. Same goes for people who inherited an IRA.
However, if you turned 72 in 2021, you have until April 1, 2022 to take your first distribution.
Whatever you do, don’t forget. If you fail to withdraw an adequate amount on time, Uncle Sam blasts you with a 50% excise tax on the money you were supposed to take.
7. Get a $300 charitable deduction, even if you don’t itemize
As the pandemic lingers, the government continues to encourage Americans to lend a hand to those in need.
In years past, you could only deduct charitable giving if you itemize your deductions. In 2020, the rules changed to allow a $300 charitable contribution deduction per tax return on top of the standard deduction.
For the 2021 tax year, that benefit has expanded even further. Instead of a $300 deduction per return, it’s $300 per person. So if you file jointly with the standard deduction, you can deduct up to $600 for charitable contributions.
That said, there are still benefits to itemizing charitable contributions.
Before 2020, you could deduct charitable contributions up to 60% of your adjusted gross income. The CARES Act raised this limit, allowing you to deduct up to 100% of your AGI, and this temporary change was extended through 2021.
So, if you go on a donation rampage, you could theoretically eliminate your entire tax bill.
How to prepare for your 2022 tax bill
Many of the changes for the 2021 tax year will help shave down the bill you’ll get in 2022, but in the end Uncle Sam still needs his cut.
To avoid getting blindsided at tax time, try some of these ideas to build up a cash cushion — and don’t forget you can grab your tax software ahead of time to save money, too.
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Take care of your debt. Credit cards are convenient in a pinch, but if you aren’t careful, expensive interest can come back to bite you. If you’re struggling to stay on top of multiple credit card balances and other high-interest debt, fold them into a single debt consolidation loan to pay off your loans faster.
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Search for savings. What paid subscriptions are you no longer using? When’s the last time you searched for a cheaper phone plan? And finally, are you taking advantage of free price comparison extensions when shopping online? They maximize your savings with no extra effort on your part.
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Refinance your mortgage. It’s not too late to refinance your home at low rates. The national average for a 30-year fixed-rate refinance is currently hovering around 3.2%. If that’s lower than your current rates, you could potentially shave hundreds off your monthly mortgage payments.
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Minimize insurance costs. When’s the last time you’ve compared auto insurance plans? If you haven’t shopped for better rates in the past six months, you might be paying hundreds more than you should be each year — hundreds that could go straight toward paying your tax bill.
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Turn your pennies into a portfolio. You don’t need a fat bank account to invest in the stock market. You can start investing with just your “spare change” from everyday purchases. Instead of letting that change jangle around in your cup holder, turn it into a diverse portfolio.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source: finance.yahoo.com