It’s tax time again.
Whether you’re a first-time filer or a seasoned pro, it’s one of those tasks some of us will delay until the deadline. But AAA partners with TaxAct to help make it less daunting for filers. Plus, your AAA Membership gets you 25% off state and federal filing (includes Refund Transfer, Audit Defense and E-File Concierge).
To get you started, here are some things to keep in mind:
Know These 7 Top Tax Changes for 2021
1. The Child Tax Credit increase and advance monthly payments
Parents: Don’t forget about those advance monthly Child Tax Credit (CTC) payments you may have received in 2021. In January, you should have received a letter from the IRS providing the total CTC amount disbursed to you during 2021. You may need this letter when filing your return.
2. Expansion of the $300 charitable contribution deduction for joint filers
In previous years, only those who itemized their tax deductions could take advantage of this tax break. But this changed in 2020, as part of the CARES Act. Single filers can still claim a maximum tax deduction of $300 for cash contributions made to qualified public charities. Married couples filing jointly can now deduct up to $600 on their 2021 tax return.
3. Unemployment benefits no longer tax-free in 2021
Those who collected unemployment payments last year received a huge tax break with the passage of the American Rescue Plan. But remember—this was a temporary measure for 2020. Anyone who received unemployment benefits in 2021 shouldn’t expect the same tax break this year.
4. Forgiven Paycheck Protection Program loans and federal tax exemptions
Small businesses and self-employed individuals who received low-interest loans through the Paycheck Protection Program can still receive a federal tax exemption as long as they meet the criteria. Here’s a handy FAQ for more information.
5. Threshold permanently lowered for Medical Expense Deduction
Itemizers with high medical costs may be relieved to learn the threshold for deducting medical expenses was permanently lowered to 7.5% of your 2021 adjusted gross income (AGI).
For example, say you itemize your deductions and your AGI for 2021 was $50,000.
That means 7.5% of your AGI is $3,750. If you had $9,000 worth of medical bills, you could claim a deduction of $5,250.
6. Tax inflation adjustments to standard deductions and more
The pandemic prompted several tax changes in 2021 to accommodate inflation.
The standard deduction, for example, increased $300 to $25,100 for married couples filing jointly, and it rose $150 to $12,550 and $18,800 for single and head-of-household filers, respectively. This deduction reduces your income, which means you’ll pay less income tax.
More notable differences include changes to the Earned Income Tax Credit, capital gains tax rates, and the Lifetime Learning and adoption credits. Read more about inflation-related tax adjustments here.
7. Expansion of the Earned Income Tax Credit for 2021 and future years
If you meet the IRS income requirements, you could claim the Earned Income Tax Credit (EITC) for 2021. To qualify, you need to have lived in the U.S. for more than half of 2021 and cannot be claimed as a dependent or qualifying child on someone else’s tax return.
There’s no maximum age limit to claim the EITC, but minimum age requirements must be met, depending on your situation.
- You must be at least 24 to claim if you were a student for at least five months in 2021.
- You must be at least 18 to claim if you were in foster care any time after turning 14—or if you were ever homeless in any taxable year.
- You must be at least 19 in all other circumstances.
Other EITC changes include increased limits for investment income and qualifying child credits if married but filing separately.
Here’s more about these top changes, as well as a rundown of what hasn’t changed for 2021.
Advice for First-Time Filers
Now that you know what’s changed, here are some tips if you’re new to filing taxes. Firstly, don’t stress! Most first-time filers tend to have simpler finances, so these basics should help get you started:
1. Start collecting tax information early
Trying to locate receipts for medical or business expenses can be stressful if you don’t have them organized. If it’s too late to do so this year, remember to do it next year and create a filing system. Don’t overlook items such as printer ink and business-related parking and tolls. Keep track of your business mileage electronically.
2. Organize your tax documents
It can be as simple as putting your W-2 forms in one pile, additional income in another and deductible expenses in a third. If you run a small business or have other self-employment income, create a spreadsheet of income and expenses. Don’t forget to organize information for possible credits, such as the Child Tax Credit.
Here’s a handy tax preparation checklist to help keep you organized.
3. Does someone claim you as a dependent?
It’s one of the most important details you need to know before filing your tax return. If your parents—or someone else—paid more than half your expenses this past year, the IRS generally considers you to be their dependent for tax purposes. If so, simply claim yourself as a dependent on their return when you e-file.
The IRS may reject your return if you fail to indicate someone claims you as a dependent and they claim you on their taxes.
Review the IRS’s current rules about who can be claimed as a dependent on someone else’s return here.
4. Determine your tax filing status
The IRS uses your tax filing status to determine what they need on your return. It can also determine your standard deduction amount and your eligibility for certain tax credits.
Filing status options are single, married filing jointly, married filing separately and head of household.
5. Read your return
Filing is easy and efficient with online tax software like one of TaxAct’s digital or download solutions. But be sure to read your return. If you don’t understand something, check out these TaxAct help topics.
6. Give yourself ample time
For tax year 2021, the IRS will start accepting and processing returns on Jan. 24, and you have until April 18, 2022, to file your federal return.
Filing deadlines for state income tax returns vary by state. Be sure to mark your calendar to give yourself time to meet the deadlines. If you run behind, you can file an extension for more time, which is more advisable than rushing through it.
A Quick Look at Filing Taxes in Retirement
Once retired, you no longer pay Social Security and Medicare payroll taxes. If you live in one of the nine payroll-tax-free states, you still must pay income taxes on local and federal levels. You will also need to pay taxes on your pension, traditional IRA, 401(k), annuity and other types of pretax retirement accounts.
Here’s a look at other taxes you may also need to pay:
Social Security: You might have to pay taxes on Social Security benefits if you earn additional income. Your combined income determines the amount.
Sales: Unless you live in a state without a sales tax, you must still pay it. Here’s more about state sales tax rates.
Property: If you own a home, you’ll need to pay property taxes, based on how much the property and land are worth.
Inheritance and estate: An estate tax is a tax on your right to transfer property upon your death, according to the IRS.
There is a federal estate tax, which is usually applicable when assets are worth more than $11.7 million. Some states also have estate taxes; thresholds are lower than federal estate taxes.
An inheritance tax is a state tax on assets inherited after someone dies. Inheritance tax rules vary by state. In some states, if you’re the spouse or child of the deceased, the inheritance received isn’t taxable.
Filing taxes in retirement can be simple with TaxAct. You can do it independently or with the help of a TaxAct expert or CPA. Find all the tax filing plans available here.