Taxpayers are facing a long list of tax changes for the 2022 tax year
Smart taxpayers will start planning for those now
Tax planning is an important part of finances for both the individual as well as a business. However proper tax planning requires a lot of information regarding the tax changes and tax laws in the country. Another year of fighting with the Coronavirus has led to several changes in the tax law for the year 2021. While we all plan for taxes at the end of the year, it gives an added advantage of planning the taxes from the very beginning of the year itself. After all, the more tax planning you do, the more money you may be able to save. So, in order to be a smart taxpayer, you will have to be aware of the changes in the tax law. Some of the biggest changes in the tax law are:
- Expanded child tax credit- The American Rescue Plan increased the child tax credit for the year 2021 to $3,000 for families with kids 17 and under, with an extra $600 for children under age 6. While many American children and families with children received advanced credits, there are many people who earned more than the given credit limit as well. Those people might have to return the credit to the government. To qualify for the full child tax credit, single filers need a modified adjusted gross income of less than $75,000 and married couples filing together must earn under $150,000. The smart payers, those who wish to claim the full credit will start planning from the very beginning and will collect all documents and files on time to get the full return.
- Charitable deductions- Taxpayers who are planning for a year-end charitable donation can take advantage of a special write-off for cash gifts in 2021. There are some major changes in the tax write off for cash donations even if they don’t itemize deductions on their federal tax return. So, if you wish to save some money from the tax, give donations in cash so that you can save your money from the tax. You can collect slips of the donations done in cash to use them for tax filing and become a smart tax payer. For 2021, single filers may claim a tax break for cash donations up to $300 and married couples may get up to $600.
- Health insurance premiums- The government increased health insurance premium subsidies making coverage more affordable for millions of Americans. While the exchange has temporarily capped premiums at 8.5% of household income, the tax return filers may have to repay some of the benefits if earnings exceed the thresholds for the year 2021. So, in case any citizen has more income than the prescribed one, they might have to return some money to the government. It can really be a very unpleasant and stressful situation for those folks that have to pay the money back.
- Required minimum distributions- There is a change in the minimum distribution as well. The contribution limit for traditional IRAs and Roth IRAs also stays steady at $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and up. However, the income ceilings on Roth IRA contributions went up. Contributions phase out in 2021 at adjusted gross incomes (AGIs) of $198,000 to $208,000 for couples and $125,000 to $140,000 for singles (up from $196,000 to $206,000 and $124,000 to $139,000, respectively, for 2020).
- Tax bracket ranges changed- Although there is not much change in the tax rates, there are some changes in the tax range brackets. The difference is due to inflation during the 12-month period from September 2019 to August 2020. Smart taxpayers and fillers must take advantage of this bracket to start planning their tax returns from the very beginning itself.
- Standard deductions- The world saw inflation at a greater rate because of the coronavirus. So, in order to fight inflation, the standard deduction amounts were increased in the year 2021. Married couples get $25,100 ($24,800 for 2020), plus $1,350 for each spouse age 65 or older ($1,300 for 2020). Singles can claim a $12,550 standard deduction ($12,400 for 2020) — $14,250 if they're at least 65 years old ($14,050 for 2020). Head-of-household filers get $18,800 for their standard deduction ($18,650 for 2020), plus an additional $1,700 once they reach age 65. Blind people can tack on an extra $1,350 to their standard deduction ($1,700 if they're unmarried and not a surviving spouse). This information helps in filling the correct amount of tax and on time to be a smart taxpayer.
- Americans working abroad- The U.S. taxpayers who are working abroad have a reason to rejoice, as there is a major change for them in the tax bracket. There is larger income exclusion in 2021 for the people living and working abroad. Earlier the taxable income was above $107,600 for the year 2020 which jumped to $108,700 for the year 2021. The standard ceiling on the foreign housing exclusion is also increased from $15,064 to $15,218 for 2021.
- Unemployment compensation- The American Rescue Plan Act enacted in the year 2021, made up to $10,200 of unemployment compensation ($20,400 for married couples filing jointly) exempt from federal income tax for households with an adjusted gross income less than $150,000. But those who filed the return before the exemption was enacted might send refunds to the government.
- Child and Dependent Care Tax Credit- There were some major changes made in the Child and dependent care tax credit in the year 2021 by the American Rescue Plan. But, this applies to the 2021 tax year only. For 2021, the child and dependent care credit are fully refundable. The maximum credit percentage also jumps from 35% to 50%. More of your care expenses are available for the credit, too. For 2021, the credit is allowed for up to $8,000 in expenses for one child/disabled person and $16,000 for more than one. When the 50% maximum credit percentage is applied, that puts the top credit for the 2021 tax year at $4,000 if you have just one child/disabled person in your family and $8,000 if you have more. In addition, the full child and dependent care credit will be allowed for families making less than $125,000 a year (instead of $15,000 per year). After that, the credit starts to phase out. However, all families making between $125,000 and $438,000 will receive at least a partial credit. So, take advantage of this change in the tax law.
Apart from the above-mentioned tax law changes, other tax law changes are also being made which need to be read carefully before filling for the tax return 2021. This will help you take proper advantage of the tax law changes and file your returns precisely and get the maximum benefit from it.
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