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What you should know before filing your 2021 income taxes

Last year was unlike any other, and guess what? Your tax return will be too. Here’s our guide to what’s new.

The tax filing deadline may have been extended to May 17, but that doesn’t mean you should procrastinate on your 2020 tax return. Last year was fairly significant, tax-wise; not only did we get the typical adjustments to standard deductions and tax brackets, but legislation like the CARES Act also changed the ways in which certain types of expenses could be deducted.

Plus, you might have received unemployment compensation, taken a coronavirus-related distribution from your 401(k) or had an unusual amount of medical bills in 2020 — and an unexpected financial year nearly always leads to a few tax return surprises.

We reached out to Betty Wang, CFP®, founder and president of BW Financial Planning and advisor at the XY Planning Network, to learn more about tax updates that might affect your 2020 tax return. It’s always a good idea to talk to your own CPA or tax professional before the tax deadline if you have specific questions about your tax obligations — but you can use Wang’s advice to help you narrow down the questions you plan to ask this tax season.

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Filing Taxes 2021: What Are the Different Tax brackets?

“For 2020 tax returns, you should be aware of the tax bracket increases,” says Wang — so let’s take a look at the 2020 tax brackets to see where you might fall.

Marginal tax rate Individuals filing singly Married couples filing jointly
37% Incomes over $518,400 Incomes over $622,050
35% Incomes over $207,350 Incomes over $414,700
32% Incomes over $163,300 Incomes over $326,600
24% Incomes over $85,525 Incomes over $171,050
22% Incomes over $40,125 Incomes over $80,250
12% Incomes over $9,875 Incomes over $19,750

 

Remember, these tax brackets represent marginal tax rates — which means that if you are a single filer who earned $100,000 in 2020, only the $14,475 above $85,525 will be taxed at the 24% tax rate. The rest of your taxable income will be taxed proportionally according to the bracket in which it falls.

For more information, read the IRS announcement regarding 2020 tax rates.

Standard deduction for filing taxes 2021

If you’re trying to decide between itemizing your deductions and taking the standard deduction, keep in mind that the standard deduction increased in 2020. (In case you forgot, the standard tax deduction is the amount of your income that’s not subject to federal income taxes.) The standard deduction generally increases year over year, so this year’s increase probably isn’t coming as too much of a surprise — but it’s still worth noting.

“The standard deduction for 2020 increased to $12,400 for single filers and $24,800 for married couples filing jointly,” Wang explains. As you might remember from filling out your 2019 taxes, the standard deductions were previously set at $12,200 for single filers and $24,400 for married couples filing jointly — which means that in 2020, you’ll be able to deduct an additional $200 if you’re filing solo, or $400 if you’re filing jointly as a couple.

For more information, talk to a tax professional or read the IRS guide to standard deductions.

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Charitable donations

A lot of us decided to prioritize charitable giving in 2020 — and the IRS is ready to reward us for our generosity. “If you use the standard deduction, which over 90% of us do, you can deduct up to $300 in donations for 2020 due to the CARES Act,” explains Wang.

The donations must be cash (non-cash assets don’t qualify for the tax deduction) and can include checks or online payments. Only donations to qualifying organizations, which the IRS describes as “those that are religious, charitable, educational, scientific or literary in purpose,” are eligible for the deduction.

For more information, read the IRS guide to how the CARES Act changes deducting charitable contributions.

Medical expenses

“If 2020 brought you a large amount of medical bills, you should check to see if your out-of-pocket medical expenses are above 7.5% of your adjusted gross income,” Wang advises. Any out-of-pocket medical expenses that exceed 7.5% of your AGI can be itemized on a Schedule A — which means it might be worth doing the math to see whether you’ll be better off with the itemized deduction or the standard deduction.

This deduction only applies to unreimbursed medical expenses (hence the term “out-of-pocket”) and only includes the portion of your medical expenses that is larger than 7.5% of your adjusted gross income. If your 2020 AGI is $100,000 and you had $8,000 in unreimbursed medical expenses, for example, you can only include $500 of those expenses as an itemized deduction.

That may not sound like much, but it’s more than you used to be able to deduct — previously, you could only itemize unreimbursed medical expenses that exceeded 10% of your AGI. “This 7.5% threshold was made permanent in 2020,” explains Wang.

For more information, read the IRS guide to medical and dental expenses.

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401(k) distributions

“If you took a coronavirus-related distribution out of your 401(k) as part of the CARES Act, then you have some choices to make,” says Wang. “If you don’t need to use the money, you have three years to put the money back. You’ll be refunded any taxes you paid.”

Remember, you aren’t required to return your coronavirus-related distribution — but if you decide to put the money back into your 401(k), you might want to prioritize those payments so you don’t miss out on potential market growth. “Generally, it’s recommended to put the money back as quickly as possible if you don’t need the funds so you can get back on track for saving for your retirement,” Wang advises.

If you elect not to put the money back, keep in mind that you’ll owe taxes on your distribution — but you can ease the burden by spreading those tax payments out over three years.

For more information, read the IRS guide to coronavirus-related relief and retirement plans.

Unemployment benefits

Many people received unemployment benefits in 2020 due to coronavirus-related furloughs and layoffs — and although these unemployment benefits are usually taxed, the latest coronavirus stimulus package changed the rules for people filing 2020 taxes.

On Friday, President Biden signed the American Rescue Plan Act into law. This new legislation states that if your household earned less than $150,000 in 2020, you won’t have to pay federal taxes on the first $10,200 in unemployment benefits received in 2020. If your household earned over $150,000, your unemployment benefits are fully taxable.

What does this new legislation mean for people who have already filed their taxes in 2020? We’ll need to wait for IRS guidance before offering any definitive advice — but you may be required to file Form 1040X to amend your previously-submitted taxes.

If you received unemployment benefits in 2020, you should receive Form 1099-G, Certain Government Payments. This form lists the total amount of unemployment compensation received, as well as any federal income tax that has already been withheld. You’ll need to report that information on both a Schedule 1 and on your Form 1040.

For more information, read the IRS guide to unemployment compensation  as well as any updates related to the new coronavirus relief legislation — and don’t forget that your unemployment benefits might be taxable at the state level as well.

Identity theft protection

There’s one more tax tip Betty Wang wants you to keep in mind when you file for 2020 — and that’s to consider signing up for an IRS Identity Protection PIN.

“With tax-related identity theft on the rise, the IRS offers all taxpayers a way to add an additional layer of protection through its Identity Protection PIN program,” explains Wang. “The program was historically available only to victims of identity theft. This is the first year it is available to all taxpayers.”

The Identity Protection Pin, or IP PIN, is a six-digit number that helps to verify your identity on your tax return. There are a number of tax-related scams out there — the IRS recently listed a “dirty dozen” — and signing up for an IP PIN could provide the extra level of security that might prevent someone else from filing a return under your name or claiming a tax refund on your behalf.

For more information, read the IRS Identity Protection PIN FAQ — and consider adding “get an IP PIN” to your to-do list of tax-related items that need to be completed before the tax season ends on April 15.

You’ll get it all done before the tax season ends. You always do. And hey, if you don’t, you can always request a tax extension.

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About Nicole Dieker

Nicole Dieker has been a full-time freelance writer since 2012, with a focus on personal finance and habit formation. In addition to Haven Life, her work regularly appears at Lifehacker, Bankrate, CreditCards.com, and Vox. Dieker spent five years as a writer and editor for The Billfold, a personal finance blog where people had honest conversations about money, and is the author of Frugal and the Beast: And Other Financial Fairy Tales.

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Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

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