10 Ways the tax season can look different in 2021
Most of the people in our country have suffered from a financial setback due to the COVID-19 pandemic. Amidst this explosive situation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed in March 2020, provided some tax breaks for our country's people. But it was about to expire at the end of 2020.
Thanks to the 5,593-page Consolidated Appropriations Act (CAA)! It has offered many tax extenders to make some of the deductions and credit permanent, and others to extend until the end of 2025.
This year, the tax season has started a bit later than usual on February 12, 2021, and you must file your return by April 15, 2021. The IRS is ready to process almost 150 million tax returns this year. In 2020, the standard deduction increased to $12,400 for single filers and $24,800 for married couples filing jointly. Besides, due to inflation, the income tax brackets have increased too.
Here we will have a detailed discussion on how tax season will look different for you this year.
1. Recovery Rebate Credit to claim your missed stimulus payments
The CARES Act provided stimulus checks of a maximum of $1,200 per person and $500 per eligible dependent child under 17. The eligibility for receiving stimulus payments was decided based on the 2019 or 2018 income reported on federal income tax forms.
In the case of the second round of stimulus checks, the eligibility criteria remained the same. It provided a maximum of $600 per eligible person and dependent child. Married couples who filed jointly in 2019 receive $1,200 in total. Besides, families get an additional $600 for each eligible dependent child under 17.
However, according to the US Department of the Treasury, almost 8 million households still haven’t received their $1,200 checks from the first round of stimulus payments in April. There can be myriad reasons behind this delay, like IRS errors, accidental garnishment, etc. Besides, some recent changes in your life can make you eligible for receiving additional stimulus payments, like:
- You have become a parent of a child under the age of 17 within December 31, 2020.
- Your income reduced in 2020 compared to 2018 or 2019 (based on which the stimulus payment is calculated)
If you did not receive your stimulus checks, you are eligible for claiming the Recovery Rebate Credit. You can claim that credit by filling out a new, special section (Line 30) on your 2020 “Form 1040”. If you are a senior citizen, you will have to fill out a particular al section (Line 30) on your 2020 “1040-SR”. The credit will be added to any refund or reduce the tax you owe on your 2020 return.
Remember, this is applicable even if you don’t have to file a tax return due to a lower income. According to the IRS, the credit will only increase the amount you receive as a tax refund or decrease what you owe. It won’t subtract from the refund you’re entitled to. Also, the IRS won’t consider your stimulus checks for calculating your taxes.
2. Earned income tax credit (EITC)
EITC is a refundable tax credit to benefit the working individual taxpayers with low to moderate-income. You can receive a credit equal to a percentage of your income up to a maximum credit which depends on your filing status and the number of children you have. For the tax year 2020, the earned income credit can range from about $538 to $6,660.
But many people have either lost their jobs or got pay cuts due to the COVID-19 pandemic. Eventually, it can result in a smaller credit than other years.
But you don’t need to worry. The CAA allows you to choose either your 2019 income or your 2020 income to receive the highest EITC credit.
3. The tax-free status of employer student loan contributions
If your employer helps you to repay your student loan debt, the CARES Act has provided a tax-free status for those contributions. Employers could contribute up to $5,250 per employee toward eligible education expenses between March 28, 2020, to December 31, 2020.
But the CAA has extended this tax-free treatment for the employers to cover qualified student loan debt payments under Section 127 plans through December 31, 2025.
4. Remote workers
Many companies offered their employees to work remotely to maintain social distancing norms and stay away from this deadly virus. If you are one of them, you may have incurred some expenses for working remotely. But the sad news is, those expenses are not tax-deductible.
Besides, let’s say, while working from the office, you worked in the state of Arizona. But to work remotely, you have come to your home in Hawaii. In that case, your taxation will depend on Hawaii's state laws, or you may be taxed in both states.
However, if you are self-employed, the expenses of running your home office are tax-deductible.
5. Forgiven debt
If you settle a debt for a lower amount than you owe or get canceled or forgiven, you will have to pay taxes on the money you save. It is known as cancelation of debt (COD) income.
However, it did not apply to the COD income due to a short sale or a foreclosure on your home before January 1, 2021. But the CAA extends this tax breakthrough 2025. But the COD income that can be excluded from your taxable income has been reduced. If you are a single filer, you can exclude $375,000 of your COD income, and if you are married and file jointly, you can exclude $750,000 from your taxable income.
6. Private mortgage insurance
Are you planning to take out a mortgage? If so, you may have to pay for private mortgage insurance (PMI) every month if you can’t make a down payment of more than 20% of the house’s price.
But if you itemize these deductions, the CAA allows you to deduct these premiums from your taxable income through 2021.
7. Flexible spending account (FSA)
An FSA is a savings account set up by employers for their employees. You can contribute a part of your income every month, and your employer can also contribute to your account. The most significant advantage of FSA is that you don’t need to pay taxes on your contributions. You can withdraw funds to pay for qualified medical and dental expenses without paying any tax.
Usually, you should use the funds in your FSA within the end of a year. But the CAA has allowed you to carry over the unused balance of your 2020 and 2021 FSA balance to the following year.
8. Medical expenses
Have you or your family members had costly medical treatments recently? If so, you can keep those receipts to deduct those amounts from your tax bills.
You can deduct qualified medical expenses that are more than 7.5% of your 2020 adjusted gross income (AGI). The CAA has made the threshold of ‘7.5% of your AGI’ permanent from 2021.
9. Charitable deductions
Have you made any cash donations of up to $300 e before December 31, 2020? If so, you can claim an income tax write-off without itemizing your deductions.
Remember, it is applicable if you have made donations to any of the IRS-qualified organizations. In 2020, the threshold of $300 was applicable for both single and married (filing jointly) taxpayers.
However, in 2021, the CAA has extended this benefit to the cash contributions up to $300 for single filers. And those who are married and filing jointly, the threshold has been raised to $600.
The reason behind this move is to encourage more people for charitable donations during this critical time.
10. Unemployment benefits
According to a recent CNN Business report, about 885,000 people in our country filed for unemployment benefits. If you are one of them and opted for it for the first time, you may get surprised to see it on your tax bill. The reason being, unemployment benefits are usually taxed, and this year is not an exception too.
So, if you are a newbie applying for unemployment benefits, this year’s tax season will be different for you. Upon receiving unemployment benefits, you must have received Form 1099-G from your state. So, you need to report your unemployment benefits on line 7, Schedule 1 of your Form 1040 (federal income tax return).
However, if your income doesn't meet the IRS's income filing requirements, you don't need to worry about it.
The bottom line is that the tax season is going to be different this year. The tax extenders provided in the Consolidated Appropriations Act can bring a sigh of relief to many people in our country. We have tried to list the points that can help you understand how different this year's tax season will be. In case you need any help with understanding your tax implications, I would suggest you consult with your tax professional asap.