4 Ways Your 2021 Taxes Will Be Different From 2020’s

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Ajay Kumar, CPA, MBA
  1. Charitable deductions

Start with the $300 charitable deduction for filers who don’t itemize. This provision allows you to claim up to $300 in cash donations, which reduces your adjusted gross income and your taxable income — as well as your tax bill. You can take the deduction only if you take the standard deduction rather than itemizing your deductions.

When you filed your 2020 tax return this year, the $300 charitable deduction was for each taxable unit — meaning you got a $300 deduction whether you filed as a single taxpayer or a married couple filing jointly. When you file your 2021 taxes next year, however, married people filing jointly can each take a $300 charitable deduction for cash donations, for a total of $600.

  1. Lifetime Learning Credit

Another enticing tax break: the Lifetime Learning Credit. It’s for qualified tuition and related expenses paid for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills — for yourself, your spouse or dependents.

Unlike deductions, which reduce your taxable income, tax credits decrease your tax bill dollar-for-dollar. If, for example, you had a $4,000 tax credit and your tax bill was $5,000, you’d owe $1,000. If you owed $3,000 in taxes and had a $4,000 credit, your bill would drop to zero.

Congress raised the 2021 income limits for the Lifetime Learning Credit, which can be worth as much as $2,000. Instead of phasing out at income levels starting at $59,000 for single filers and $118,000 for joint filers, as it did for the 2020 tax year, the phaseout will begin at $80,000 for single filers and $160,000 for joint filers this year.

  1. Medical expense deduction

If you’re able to itemize your deductions and you have high medical expenses, don’t miss out on this tax break that’s now permanent. Before the 2017 tax reform law temporarily lowered the threshold for deducting medical expenses to 7.5 percent, the figure was 10 percent. This meant you could only deduct medical expenses that exceeded 10 percent of your income. So if you made $70,000 in a year and had $8,000 worth of medical expenses, you could deduct only $1,000 of those expenses since the expenses equal to the first 10 percent of your income ($7,000) didn’t qualify.

Thanks to stimulus relief legislation passed in December 2020, the floor has been lowered permanently to 7.5 percent. In the example above, $5,250 of your medical expenses (7.5 percent of $70,000) wouldn’t be deductible, but you’d be able to deduct $2,750. Again, you’d have to have more total deductions than the standard deduction to make deducting your medical expenses worthwhile.

  1. Standard deduction

Even if you don’t itemize your deductions, you still get a break from Uncle Sam in 2021. Congress nearly doubled the standard deduction in the 2018 tax year and mandated that it be increased each year for inflation. The standard deduction for the 2021 tax year is $12,550 for single taxpayers, up $150 from 2020, and $25,100 for married couples, up $300 from 2020.

The standard deduction is even higher if you’re 65 or older. Married and filing jointly? Add an extra $1,350 for each spouse 65-plus. That’s up from $1,300 for the 2020 tax year. Singles and heads of households 65 or older get an extra $1,700 tacked on to the 2021 standard deduction, up $50 from 2020.

The standard deduction reduces your income, which, in turn, reduces your income taxes. It also greatly limits the number of filers who can itemize their deductions — it makes no sense to itemize if you don’t have enough deductions to exceed the standard deduction. The number of people who itemized their taxes fell from 46.5 million in 2017 to just over 18 million in 2018, when the tax reform law took effect, according to the Tax Foundation.

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