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.