2021 Tax Updates Everyone Needs to Know Before Filing Their Taxes

Tax professionals offer the best option for learning about 2021 tax updates. A good CPA can provide you with updates that can affect you when filing your taxes and can hopefully reduce the taxes you owe or increase the refund you’re owed.  Here are some suggestions from a CPA that we know and trust.

2021 Tax Updates You May Have Overlooked

Charitable Tax Deductions

Charity tax deductions are still available, allowing you to take advantage of giving away some of your money. One of the main differences this year is that you’ll need to itemize your charitable tax deduction, which is an unexpected change for a lot of people.

You can deduct at least $300 for an individual or $600 for a couple.

Itemizing your deductions only makes sense when you have more than the standard deduction of $12,500 or $25,000 for couples. For example, it makes more sense not to itemize your deductions when the itemized deduction comes out to less than the standard deduction.

Straight donations are mostly the same, so it’s important to get a receipt. You should be itemizing deductions to really leverage straight deductions which may include:

• Cleaning out your attic
• Donating items to Goodwill or another charity

When you’re donating to charity, you can donate up to 60% of your adjusted gross income for tax purposes. Most individuals will not hit this threshold because it’s high, but it is something high net worth individuals may want to think about.

Bonus: Qualified Charitable Distributions (QCDs) are for people older than 70.5, and it allows you to take money out of your IRA and donate directly to charity. This can be done on top of your standard deduction and must be made out directly to the charity. When you do this, you’re not taxed on the withdrawal and you can deduct the donation on your taxes to offer a double benefit to you.

Medical Deductions

When you’re older, closer to retirement or have had to pay for medical procedures in the past year, medical deductions are something that you should be considering. A lot of medical deductions can be made:

• Insurance
• Prescriptions
• Direct doctor costs

If you have a major deduction, you may want to itemize to leverage these deductions. The $12,500 or $25,000 deduction will need to be considered because there’s really no reason to itemize if you’re not trying to deduct higher than this amount.

Reaching a high enough threshold to itemize your medical deductions is often only possible when you’ve had major medical procedures performed. A few of the procedures that may be included are:

• Dental implants
• Nursing care
• Other major issues

Earned Income Tax Credit

The earned income tax credit is based on how much you earn and how many qualifying children that you have. You need to be between 25 and 65 years old and have qualified earned income. A person must earn $16,000 as a single person or $22,000 as a couple to maximize this credit.

When you hit $51,500 as a single person and $57,500 as a couple, this is when the earned income tax credit starts to really phase out for you.

If you have no children, you can expect up to $543, and with three children, $6,700.

Child Tax Credit

A $2,000 tax credit is given to a qualified child between the age of 0 and 16. Once they hit 17 and older, this credit drops to $500, which is quite a jump. The year that the child turns 17, the credit is lowered.

There is also an income threshold for this credit:

• $200,000 for a single person
• $400,000 for a couple

Home Office Deductions

A lot of people are working from home this year. COVID has changed a lot of people’s working situations, and there are a lot of questions surrounding home office deductions. Employees that receive a W2 are no longer able to deduct their home offices.

Business owners can write off their home office if it remains their primary place of business.

You can deduct $5 per square foot, or you can itemize your deductions. The itemization is only beneficial if you can deduct more than the square foot value of your office. Remember to keep receipts on all of your expenses from your home office to ensure that you can maximize your deductions and have proof of your expenditures.

If you only work from your home office once or twice a week, you won’t be able to claim this deduction because it’s not your principal place of business if you’re working more days per week outside of your home.

Unemployment Benefits and Your Taxes

All of your unemployment income is viewed as wages. The income is reported on a 1099G, which you will use to claim all of these benefits on your taxes.

Bonus: Stimulus Check and Claiming It as Income

You do not need to claim your stimulus check on your tax return. 

Tips When Thinking About Your 2021 Taxes

A few of the tips that we want you to know about when thinking about your taxes in 2021 are:

• Financial management to manage your portfolio can help you leverage capital gains rates at the current rate. 
• Employee benefits should be managed, such as HSA, 401(k) and other options. Maximize your 401(k) and consider an HSA to use for your health expenses. The HSA can be funded and grow, and by the age of 65, you can take out the money while enjoying tax benefits. Otherwise, the HSA withdrawals all need to be medical related.
• Review federal withholdings early in the year to ensure that your withholdings are proper. Recent changes to the withholding rate have left many people paying more at the end of the year than they expected. Use the IRS.gov Tax Withholding Estimator to properly adjust your rates at the beginning of the year so that you have fewer surprises at tax season.
• Try and donate $300 to $600 to a charity this year for additional savings.
• If you’re going to itemize, consider giving more to charity if you can. Double up on donations to maximize your deductions.
• Mortgage interest rates can also be deducted on the itemized deductions.

On a final note, be sure to be compliant and file your taxes on time or get an extension. Also, make all of your estimated payments and pay what you think you’ll owe on April 15 because you’ll be penalized otherwise even if filing an extension.

 If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’. 

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