Whether we like it or not, taxes are inevitable. Taxes play an important role in each of our finances, which is why we pay such close attention to how they could change each year. 2020 has brought so many financial changes and challenges our way that it’s even more important to understand how taxes could impact you in the coming year. Here are a few tax changes you can expect to occur in 2021:
The IRS adjusts tax brackets each year to account for inflation. “The 2021 tax brackets are the rates that will determine your income tax in 2021, which is the tax return you’ll file in 2022.” Single filers with taxable income between $40,525-$86,375 will be given a 22% tax rate. Married couples filing jointly with a taxable income between $81,050-$172,750 will also be taxed at 22%. Keep in mind that these percentages are only for marginal tax brackets, and you should also consider capital gains tax. “When it comes to capital gains, the tax treatment depends on how long you owned the asset.” Click here to find your specific tax bracket.
“Tax deductions help lower how much of your income is subject to federal income taxes.” Thanks to the CARES Act of 2020, you will be able to deduct up to 100% of your adjusted gross income (AGI) in qualified donations. This is great news for those who give generously and is meant to help encourage more charitable giving. With so many people being impacted by health concerns this year, the good news is that you will be able to deduct any medical expenses above 7.5% of your AGI. Stimulus checks will not count as taxable income and Paycheck Protect Program (PPP) loans will be forgiven as long as they were used on certain business expenses.
Those under 59 ½ have until the end of this year to take up to $100,000 out of their 401(k)s and IRAs without having to pay an early withdrawal penalty. The SECURE Act pushed the required minimum distribution (RMD) age to 72, giving you more time before having to withdraw retirement income, which is subject to taxation. Seniors can also choose to skip RMDs in 2020 without tax penalty.
Tax changes can be overwhelming to keep track of. There could even be more to come as we await a new president who will likely bring new changes. The best way to make sure your taxes are done right is to get help from a financial professional. Speak with someone who can analyze your specific situation and can help you make sense of it all. Taxes are too important to leave up to chance.