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Key tax changes in 2021: what you need to know

Everyone hopes that 2021 will be very different from the previous one. When it comes to income taxes in 2021, the IRS is not planning a major change, but even without a major tax reform, there will be changes. Fool talks about what will be different in the new tax season.

Photo: Shutterstock

What will change? Briefly:

  • retentions will be of a higher standard;
  • the main provisions on popular tax incentives will change;
  • contribution limits and income thresholds for retirement accounts such as IRAs and 401 (k);
  • other incentives for taxing health and education accounts will increase;
  • there will be an exemption from gift and inheritance tax;
  • tax categories (“brackets”) for ordinary income, as well as qualified dividends and long-term capital gains.

Let's take a closer look at all of these tax questions to help you craft the best tax plan for 2020.

Standard retention for 2021

Most people take standard retention, not granular retention. It's a lot less work, and the amounts are now high enough that only a small percentage of taxpayers benefit more than they did with the detailed ones.

The annual inflation adjustment resulted in a slight increase in standard deductions for 2021:

  • one person - $ 12 (+ $ 550 compared to 150);
  • married couple - $ 25 (+ $ 100);
  • head of family - $ 18 (+ $ 800);
  • separate declarations in marriage - $ 12 550 (+ $ 150).

In addition to these basic standard deductions, people over 65 or blind receive an additional allowance. For those who are married, the added amount is $ 1350 and for singles it is $ 1700. Both of these figures are $ 2021 higher in 50 than in 2020.

The standard withholding amount for those minors who must file tax returns in 2021 remained the same as in 2020. Children always receive at least $ 1100 in standard deduction, and if they receive more than $ 750 in earned income from work, then standard deduction is their total earned income plus an additional $ 350 before the normal deductions listed above.

Popular tax incentives

Tax breaks (credits) reduce your tax bill in a dollar-to-dollar ratio, making them more valuable than withholdings. Some of the most popular perks include an earned income tax credit, a child tax credit, a contributor loan, and two education tax credits.

Earned income provides significant tax cuts for low- to middle-income workers. The loan amount depends on family size and income: the maximum amount is $ 6728 for families with three or more children ($ 68 more than in 2020), $ 5980 for families with two children (up to $ 60), $ 3618 for families with one child (up to $ 34), or $ 543 for childless (up to $ 5). Income amounts within the limits have slightly increased compared to last year.

Income limit in the absence of children:

  • bachelor, head of family, widower - $ 15 980
  • joint declaration of marriage - $ 21

Income limit with 1 child:

  • bachelor, head of family, widower - $ 42 158
  • joint declaration of marriage - $ 48

Income limit with 2 children:

  • bachelor, head of family, widower - $ 47 915
  • joint declaration of marriage - $ 53

Income limit with 3+ children:

  • bachelor, head of family, widower - $ 51 464
  • joint declaration of marriage - $ 57

The peculiarity of the Earned Income Tax Credit is that even if you do not owe any taxes, you can still get the loan amount back from the IRS in the form of a refund.

On the subject: Some taxpayers are in for a nasty surprise in 2021

The Investor Tax Credit is intended for low and middle income taxpayers. Depending on your income, you can get a loan of 10%, 20%, or 50% of your contributions up to $ 2000 to an IRA, 401 (k) or similar retirement account. No credit is provided beyond the maximum amount. The income limits below are slightly higher than a year ago.

Credit interest - 50% of the installment:

  • bachelor, separately filing spouse - from $ 0 to $ 19
  • head of household - from $ 0 to $ 29
  • joint filing spouses - from $ 0 to $ 39

Credit interest - 20% of the installment:

  • bachelor, separately serving spouse - $ 19 - $ 751
  • head of household - $ 29 626 - $ 32 250
  • joint filing spouses - $ 39 - $ 501

Credit interest - 10% of the installment:

  • bachelor, separately serving spouse - $ 21 - $ 501
  • head of household - $ 32 251 - $ 49 500
  • joint filing spouses - $ 43 - $ 001

Finally, there are minor changes among the two education tax credits. The Lifetime Learning tax credit offers additional education credits, even outside the traditional college. Taxpayers who earn less than $ 59 in 000 if unmarried, or $ 2021 if they filed a joint return, receive a 119% discount on eligible expenses up to $ 000 each year, with discounts up to $ 20 available 10 income for singles and $ 000 69 for joint applicants. This loan is available to pay for graduate school, vocational training, and some other educational expenses.

Pension tax planning

2021 does not promise big changes in key points such as contribution limits for IRAs and 401 (k) s. In 2021, IRA contribution limits will be the same as in 2020: $ 6000 for those under 50 and $ 7000 for those 50 and over. Likewise, the 401 (k) contribution limits will remain $ 19 for those under 500 and $ 50 for those 26 and over.

However, there are other aspects as well. Traditional IRAs always allow contributions to be made regardless of income, but you cannot always deduct those contributions. Roth IRAs may prohibit contributions if your income is too high. Below the tax phase-out range, you are eligible for a full contribution or deduction. Above this no deposits or deductions are allowed. With it, you can subtract or deposit only a fraction of the $ 6000 or $ 7000 maximum amount.

Bachelor:

  • Roth IRA phase-out range - $ 125 - $ 140
  • IRA waiver range with employer sponsored account - $ 66 - $ 76
  • IRA Waiver Range if Spouse has an Employer Sponsored Account - NA

Joint submitting spouses:

  • Roth IRA phase-out range - $ 198 - $ 208
  • IRA waiver range with employer sponsored account - $ 105 to $ 000
  • Range for IRA Waiver if Spouse Has an Employer Sponsored Account - $ 198 - $ 208

Separated spouses:

  • Roth IRA phase-out range - $ 0 to $ 10
  • IRA waiver range with employer sponsored account is $ 0 to $ 10
  • IRA drop range if spouse has an employer-sponsored account is $ 0 to $ 10

Such income restrictions do not apply to 401 (k) contributions. This, in part, makes them especially valuable to high-income taxpayers.

What other preferential tax accounts will be available in 2021

There are other ways to save on taxes. In education, the 529 and Coverdell ESA plans allow you to save money for tax-exempt studies if you use the money for the related expenses. There are no income limits for 529 plans. Income caps of $ 95 to $ 000 for individual tax fillers and $ 110 to $ 000 for joint applicants are applied to reduce or eliminate Coverdell's maximum contribution of $ 190 per year.

To cover health care costs, those with high deductibles can use medical savings accounts to set aside money for future treatment costs. Contribution amounts up to $ 3600 for those with a single policy, or $ 7200 for family policies, apply in 2021 with a minimum annual deduction of $ 1400 or $ 2800, respectively. An eligible $ 1000 premium is available if you are 55 or older, but the eligible plan must include a maximum personal expense of $ 7000 for single-person policies or $ 14 for family coverage.

Inheritance taxes

For high net worth individuals, the lifetime gift and inheritance tax exemption amount is a key indicator of how much wealth you can pass on to the next generation without paying taxes. In 2021, this amount will grow to $ 11,7 million, up from $ 11,58 million in 2020.

More and more people are paying attention to the amount of the annual gift tax exemption. This allows you to give up to $ 15 per year to any number of recipients in 000.

On the subject: On diapers, sweets and the Internet: the strangest taxes in the US

Tax categories for 2021

Tax categories (brackets) depend on your income. In the US, the more you earn, the higher these parameters are for every additional dollar you earn. The rate cap does not apply to all of your income - only income in certain parentheses.

If you are applying as an independent taxpayer, the following brackets apply:

$ 0 to $ 9950:

  • Tax - $ 0 plus 10%
  • From the amount over - $ 0

From $ 9950 to $ 40:

  • Tax - $ 995 plus 12%
  • From the amount over - $ 9950

From $ 40 to $ 525

  • Tax - $ 4664 plus 22%
  • From the amount over - $ 40 525

From $ 86 to $ 375

  • Tax - $ 14 plus 751%
  • Out of the amount over - $ 86

From $ 164 to $ 925

  • Tax - $ 33 plus 603%
  • From the amount over - $ 164 925

From $ 209 to $ 425

  • Tax - $ 47 plus 843%
  • From the amount over - $ 209 425

Above $ 523

  • Tax - $ 157 plus 804,25%
  • From the amount over - $ 523 600

The head of household has a higher income threshold applied to each tax category, resulting in a lower tax. To be eligible to be the head of household, you must be unmarried and provide housing and financial support for a child, parent, or other relative who has lived with you for more than six months. The amount must be more than half of all support received by a child or other relative during the year.

Tax categories for the head of household:

$ 0 to $ 14

  • Tax - $ 0 plus 10%
  • From the amount over - $ 0

From $ 14 to $ 200

  • Tax - $ 1420 plus 12%
  • From the amount over - $ 14 200

From $ 54 to $ 200

  • Tax - $ 6220 plus 22%
  • From the amount over - $ 54 200

From $ 86 to $ 350

  • Tax - $ 13 plus 293%
  • From the amount over - $ 86 350

From $ 164 to $ 900

  • Tax - $ 32 plus 145%
  • From the amount over - $ 164 900

From $ 209 to $ 400

  • Tax - $ 46 plus 385%
  • From the amount over - $ 209 400

Above $ 523

  • Tax - $ 156 plus 355%
  • From the amount over - $ 523 600

Most married taxpayers submit documents jointly. If you have been married but your spouse has recently passed away, then you are also allowed to use these brackets as your surviving spouse:

$ 0 to $ 19

  • Tax - $ 0 plus 10%
  • From the amount over - $ 0

From $ 19 to $ 900

  • Tax - $ 1990 plus 12%
  • From the amount over - $ 19 900

From $ 81 to $ 050

  • Tax - $ 9328 plus 22%
  • From the amount over - $ 81 050

From $ 172 to $ 750

  • Tax - $ 29 plus 502%
  • From the amount over - $ 172 750

From $ 329 to $ 850

  • Tax - $ 67 plus 206%
  • From the amount over - $ 329 850

From $ 418 to $ 850

  • Tax - $ 95 plus 686%
  • From the amount over - $ 418 850

Above $ 628

  • Tax - $ 168 plus 993,50%
  • From the amount over - $ 628 300

You may be interested in: top New York news, stories of our immigrants and helpful tips about life in the Big Apple - read it all on ForumDaily New York.

Some married taxpayers prefer to file separate returns. These are the applicable brackets:

$ 0 to $ 9950

  • Tax - $ 0 plus 10%
  • From the amount over - $ 0

$ 9950 to $ 40

  • Tax - $ 995 plus 12%
  • From the amount over - $ 9950

From $ 40 to $ 525

  • Tax - $ 4664 plus 22%
  • From the amount over - $ 40 525

From $ 86 to $ 375

  • Tax - $ 14 plus 751%
  • From the amount over - $ 86 375

From $ 164 to $ 925

  • Tax - $ 33 plus 603%
  • From the amount over - $ 164 925

From $ 209 to $ 425

  • Tax - $ 47 plus 843%
  • Of the amount over - $ 209 425A

More than $ 314 150

  • Tax - $ 84 plus 496,75%
  • From the amount over - $ 314 150

Finally, there are trusts that are taxed as separate legal entities. The same is with the property of the deceased:

$ 0 to $ 2650

  • Tax - $ 0 plus 10%
  • From the amount over - $ 0

$ 2650 to $ 9550

  • Tax - $ 265 plus 24%
  • From the amount over - $ 2600

From $ 9550 to $ 13v

  • Tax - $ 1921 plus 35%
  • From the amount over - $ 9450

Over $ 13

  • Tax - $ 3146 plus 37%
  • From the amount over - $ 12 950

Tax rate on long-term capital gains and qualified dividends

If you have dividends that meet the criteria, or if you have capital gains on investments that you have held for more than a year, you can get a lower tax rate on that portion of your income:

Profit rate 0%

  • Bachelor - up to $ 40 400
  • Joint filing in marriage - up to $ 80 800
  • Head of family - up to $ 54
  • Separate filing in marriage - up to $ 40

Profit rate 15%

  • Bachelor - $ 40 400- $ 445 850
  • Joint filing in marriage - $ 80 800 - $ 501 600
  • Head of Family - $ 54 - $ 100
  • Separate serving in marriage - $ 40 - $ 400

Profit rate 20%

  • Bachelor - $ 445
  • Joint filing in marriage - over $ 501 600
  • Head of family - over $ 473
  • Separate filing in marriage - over $ 250 800

Dividends on most US stocks are fine, but payments on some investments, such as real estate investment funds, are not. If you sell an investment after holding it for a year or less, then your normal rate will apply.

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