It's A New Year: What Changes Exist in your Taxes for 2021?

• Author: Chris Remington
• Posted: 2024-07-12

As 2020 turns into 2021, many have begun to turn their eyes to the annual tradition of income taxes, as the time is rapidly approaching for all of us to put together our annual returns. 2021 was obviously an extremely chaotic year, and the changes made by the federal government have resulted in a slew of tax changes. Here's a look at some of the most important ones as we start to look at the new year. 

Inflationary Changes

In many instances, laws are written to automatically account for inflation or gradually move certain deductions upwards. This happened in 2021, as it was expected to. The standard deduction for single, married filing jointly, head of household, or married filing separately all increased by $150, $300, $150, and $150. Respectively, the new standard deductions are $12,550, $25,100, $18,800, and $12,550.

Contribution limits to retirement accounts are also changing as we head into the new year. Retirement limits for SIMPLE plans have increased to $13,500 - an increase of $500 over the previous levels. 

Changing Tax Brackets

The amount of federal taxes you may fall into one of seven categories: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Inflationary changes took place again, slightly raising all of these tax levels for both individuals and married couples. If you make under $9,875 (or $19,750 if you are married), you're in the 10% bracket. That number continues to rise until you hit $518,400 (or $622,050 if you are married), in which case you fall into the 37% federal income tax bracket, which is the highest level there is.

Many states tie their income taxes to federal government changes. As such, you may want to check with your state or a CPA in order to determine how these changes may impact your state taxes. 

Return of Tax Penalties for Early Withdrawals

Changes to tax law that passed as part of the CARES package in 2020 allowed individuals to make very substantial withdrawals from retirement accounts - up to $100,000 - without the usual 10% penalty. Of course, the withdrawal had to be made as a result of COVID. That removal of penalty is back into effect in 2021.

However, there is a new change: You may make a withdrawal from your retirement account without the penalty if it is related to a disaster and you live in a qualified disaster area. 

Increase in Medical Expense Deduction

The medical deduction tax is one of the more popular deductions for people with persistent health concerns. it allows individuals who take advantage of it to use this deduction if they spend more than 7.5% of their income on medical-related expenses, providing a tax break to the sickest and most financially burdened among us. Originally, legislation was set to pass that would have increased the deduction to 10%. Fortunately for them, new legislation passed that kept this deduction locked at 7.5%. 

As such, this isn't so much a new tax change, but rather a maintenance of an existing deduction in the face of an anticipated change.

The Business Meal Deduction is Back

One of the more classic tax deductions was the so-called "business meal" deduction. With this deduction, individuals could write-off the cost of a business meal, provided that two people had a meal in which they discussed business. Much to the chagrin of many in the business sector, this deduction was eliminated in the tax reform act of 2017. However, it was brought back as part of the most recent stimulus payments. As such, individuals are now cleared, again, to claim deductions for business lunches.

Of course, all of the above are changes to your federal taxes. It goes without saying that there will be many changes to your state taxes as well, and you should seek professional guidance to determine what sort of tax changes may be occurring to your state taxes. 

It is obviously extremely important for all of us to be aware of what changes we have to look forward to. The good news is that most CPAs or do-it-yourself programs are already aware of the new changes and can guide you accordingly when you file your taxes. Going forward, the best thing you can do is try to be aware of any changes for 2021's tax season. This way, you can hopefully adjust your financial behavior and planning in order to maximize your return.