2021 Tax Updates You Need to Know

COVID-19 impacted the 2021 tax season. Learn about important tax updates you need to know and how the pandemic has affected things going into 2021.

As tax time approaches, it’s important to keep in mind the changes that the IRS has instituted for the 2020 tax year. COVID-19 has changed deadlines, deduction rates, and credit, among others. Be prepared with these 2021 tax updates you need to know.

Important dates and items to remember for the 2021 tax season

While most of us want to leave the year 2020 behind us, there are some dates and other items that you need to remember during tax time regarding your 2020 finances. Here are some to keep in mind:

• You cannot file your 2020 taxes until February 12, 2021.
• Tax Day is May 17, 2021. Last year, the IRS extended tax day due to the pandemic. This year, they have also provuded an extension.
• The standard deduction for 2020 has increased to $12,400 for singles and $24,800 for married couples filing jointly.

Differences in tax brackets and the standard deduction for the 2021 tax season

While tax rates have remained the same for filing your 2020 taxes, tax brackets and standard deductions have slightly changed. These brackets have increased slightly from your 2019 taxes due to inflation. You can see a full list of the 2020 tax bracket and deduction changes here. While these changes are slight, it’s important to familiarize yourself with the differences, as you may be in a new tax bracket in 2020 than you were in 2019.

How COVID-19 may have affected your taxes

The coronavirus and ensuing pandemic causing shutdowns, government stimulus packages, and more will affect your taxes this year.

Stimulus checks

Your stimulus check will not count as taxable income for 2020. The CARES Act was a $2 trillion relief fund for American citizens and businesses. Many Americans received up to $1200 after the pandemic shut down the economy. These stimulus checks are treated as a refundable tax credit that you would have received as part of your tax refund.

Unemployment benefits

Millions of Americans found themselves out of work throughout 2020 and a record number filed for unemployment benefits. If you received unemployment benefits, you will need to pay income taxes on that money. Keep this in mind when you are filing for taxes and your refund may not be as large as you expected.

Your 401(k)s and IRAs

Many changes occurred to retirement plans in 2020, which can affect your tax bill. The CARES Act allowed Americans under the age of 59 ½ years without paying an early withdrawal penalty. It’s generally not recommended to ever dip into your retirement fund, but with the economic crisis many faced in 2020, it was given as an option to help keep people afloat. Those who did withdraw early can remain penalty-free as long as they pay back that money in the next three years.

The bottom line—taxes in 2021 are different, and you need to plan accordingly.

While there are always changes each tax season, the 2021 tax season is different. Because of the unforeseen pandemic, the government and IRS offered many relief funds and changes to help the American people. If there is any year to get help with your taxes, this is the year to do. A financial advisor can help you parse through the confusion and make sure that your taxes are filed correctly and on time.

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