The Internal Revenue tax season begins February 12, meaning individual tax returns begin being accepted and processing begins. Here are some key figures to be aware of.
—The new standard deduction for singles is $12,400; for married joint filers it is $24,800. For heads of household, it’s $18,650.
—The contribution limits for IRAs, traditional or Roth have not changed. The limit is $6,000, with an additional $1,000 for individuals aged 50 and over.
—The contribution limits for 401(k), 403(b), and most 457 plans were increased to $19,500. For individuals 50, or older, the limit is increased by $6,500.
—If you have earned income, and are older than 70 1/2, you are now allowed to make traditional IRA contributions. Prior to 2020, you could only contribute to Roth IRAs after 70 1/2.
—Health savings accounts (HSAs) have numerous tax advantages. If eligible, you should consider these accounts. Individuals can now contribute up to $3,550; if you have a family plan, the contribution limits have increased to $7,100.
—The CARES Act specified that if you don’t itemize, you can make an “above the line” deduction for cash contributions to a qualified charity for up to $300 for both individual returns and joint returns. For 2021, the marriage penalty has been eliminated, so on your 2021 return, you will be able to claim a deduction on a joint return of up to $600.
—For 2020 and 2021, for itemized returns, you will be able to deduct up to 100% of your adjusted gross income (AGI) if you make a cash contribution to a qualified charity that is not a donor-advised fund or a 509(a)(3) supporting organization.
—Any medical expenses in excess of 7.5% of AGI may be deducted. The rate had previously been raised to 10.0%.
—Business meal deduction: For 2020 and 2021, you will be able to deduct 100% of business meal expenses. Previously only 50% was allowed.
—Flexible spending account (FSA) balances from 2020 can be carried into 2021.Remaining balances at the end of 2021 can be rolled forward into 2022. Previously, there were limitations regarding the amounts that could be carried forward.
—The tuition and related expense deduction has been replaced by a more generous lifetime learning credit. The deduction could be up to $4,000 for lower income levels, or up to $2,000 for middle-income levels.
—Eligibility for 2020 earned income tax credit and for the child tax credit can be based on 2019 earned income if you wish. There is no requirement of an intention to work. Even if you left the workforce in 2019, retired in 2020 or voluntarily did not work a significant amount in 2020, you may be able to receive one or both credits for 2020.
—The CARES Act authorized employers to provide up to $5,250, of annual tax-free educational assistance for employee’s principal or interest of student debt. This has been extended through 2025. These payments can be made directly to a lender or to the employee, who can use the payments to reduce their student debt.
—Historically, if a lender forgave debt on a primary residence, the borrower would incur tax liability on the forgiven amount. In 2007, Congress provided a temporary exclusion for qualified canceled mortgage debt. That exclusion was recently extended through 2025. Starting in 2021, the maximum amount of debt that can be discharged has been reduced from $2 million to $750,000 for joint filers and from $1 million to $375,000 for single filers.
For a quicker return of refunds, I recommend filing electronically. The IRS still hasn’t processed thousands of paper returns from 2019.
And if you haven’t received either stimulus payments from 2020, you can request a recovery rebate credit on your 2020 tax return. You must request the rebate on either 2020 form 1040, or form 1040-SR. You should use the IRS recovery rebate credit worksheet for directions. If you are a non-filer because you did not have to file a return for 2018 or 2019, you will have to file a 2020 return in order to receive a payment.