IRS Changes for 2021 Taxes

Please note: this article provides general background information only and is not intended to serve as tax advice or as a substitute for legal counsel. You should consult your tax advisor or attorney if you have a question requiring legal or tax advice.

Being aware of tax changes before filing taxes can save you a headache. And before you begin looking for specific changes, it’s important to understand the vocabulary of tax season.

The tax year refers to the just-completed calendar year. So the taxes you’re filing during the 2022 tax season are for the tax year 2021. The IRS has already introduced reforms that will apply for the tax year 2022.

There are often subtle changes to the tax code, and a few sweeping tax reforms that command headlines. In 2017, the Tax Cuts and Jobs Act made big changes such as raising the standard deduction and increasing the amount of inheritance that could be protected from taxes. And in 2020, the CARES Act introduced multiple rounds of Economic Impact Payments and waived early withdrawal penalties for 401(k)s, and Advanced Child Tax Credit payments

If you have questions about your specific tax situation, it’s best to talk to a tax professional.

Here are some of the IRS tax changes you should be aware of for the 2021 tax year.

IRS Tax Changes for the 2021 Tax Year

Some changes in the tax code are relatively subtle and may not be applicable to your tax situation. For example, tax rates are the same for the 2021 tax year, but, as with other years, tax brackets shifted slightly to adjust for inflation.

There are also shifts in the standard deduction: Married couples get $25,100 instead of $24,800 from 2020.

Subtle changes of several hundred dollars or one or two percentage points may seem like no big deal, but they can affect your overall tax bill, so it can be a good idea to make sure you’re following 2021 tax year rules, and double-check anything if you’re preparing your taxes yourself.

A few changes to be aware of include:

•  Expanded Charitable Cash Contribution Write-Off. For many taxpayers, thanks to the TCJA it made sense to take the standard deduction rather than itemize deductions. People who took the standard deduction did not have the opportunity to write off charitable contributions. In tax year 2020, taxpayers who took the standard deduction were allowed to also write off $300 in charitable cash contributions. That write off has been extended and amended for the 2021 tax year. The $300 is now per person, which means married taxpayers filing jointly can claim $600. A charitable cash contribution is exclusive of political donations, which cannot be deducted.

•  Extenders on Certain Tax Breaks. Congress has the power to pass “extenders” on certain tax breaks that are scheduled to sunset in a certain year. For 2021, the extenders include the deductible eligibility of mortgage insurance premiums as well as qualified energy-efficiency home improvements up to a $500 credit limit.

•  Advanced Child Tax Credit Payments. Economic relief came for families in the form of early child tax credit payments. The full credit increased from $2000 per child to $3000 for a child aged 6 to 17 and $3600 for any child under 5 during the 2021 tax year. As part of the CARES Act, Families were granted half of their child tax credits ahead of the 2021 tax season and received their credits via monthly checks from June to December of 2021. The other half of this tax credit is to be claimed on the 2021 tax return.

•  Changes to Beneficiary IRA Inheritance. In the past, people who inherited IRAs from non-spouses had the option to “stretch” their RMDs to accommodate their life expectancy. Under the SECURE Act, people who inherit IRAs from people who die on or after January 1, 2020, are required to empty the account within 10 years. The money taken out is treated as taxable income.

•  Ability to Continue to Contribute to IRA Accounts. In the past, taxpayers over the age of 70.5 were ineligible to make contributions to IRA accounts. But beginning in 2020 and moving forward, taxpayers of any age can make contributions to their IRA accounts.

This is not a comprehensive list of IRS changes for the 2021 tax year. If you have questions about your specific situation, speak with your tax preparer.

Common Questions for the 2021 Tax Year

Are Stimulus Payments Taxable? One common question is whether stimulus payments will count as part of a taxpayer’s adjusted gross income. The answer: Stimulus payments are not counted as income and are not taxable.

Is Unemployment Insurance Taxable? If you received unemployment compensation at some point during the year, you may wonder how it will affect your year-end tax bill. Unemployment benefits, including the special unemployment compensation authorized under the CARES Act, are taxable. People who received unemployment insurance should receive a Form 1099-G. This is the payment that will be reported to the IRS. Tax rates drop as income does, so you may be in a different tax bracket than you have been in the past.

Are Employer Contributions to Student Loan Debt Taxable? As part of the CARES Act, employers were allowed to give up to $5,250 to their employees to pay down student loan debt. This money is not considered taxable income for 2021 by the IRS.

The Takeaway

Changes to the tax code combined with personal changes, such as a different employment scenario, can make it tough to navigate the 2021 tax year. Speaking with a tax professional or reading trusted online sources may help you feel less overwhelmed.

SoFi has created a tax help information center with curated articles about everything from general tax prep to weightier tax topics like capital gains, retirement savings, and stock options.

It also includes IRS links to help you file, pay, and check on the status of your taxes.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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