Tax law is subjected to changes by the government and the Internal Revenue Service all the time. Every year, there are a few changes either to the tax laws or their codes that tax filers need to be careful of when filing their tax returns.
This guide will help you understand the tax changes implemented by the IRS this year.
Higher Standard Deductions
If you take the standard tax deduction, this will allow you to simplify your tax preparation process. Itemizing your expenses won’t save you much higher on taxes, so it’s better to embrace the standard deduction amount.
This year, the new standard deduction for singles is $12,5550, which has increased by $150 from last year. For married couples filing their tax returns jointly, the standard deduction is $25,100, which has an increase of $300 compared to 2020.
For the head of the household, the standard deduction is $18,800, with an increase of $150 from the previous year, and for married couples filing separately, it is $12,5550, up by $150 from last year.
Apart from this, single people who are 65 or older and those with a visual disability get a standard deduction of $1,700, while married couples get $1,350. Both of these amounts have increased by $50 from last year.
Lastly, there is no change in the standard deduction for minors, so their amount remains at $1,100 unless they have over $750 in work income.
Tax Credit Provisions
Tax credits are better than deductions as they reduce the payable taxes dollar for dollar. There are a few changes made by the IRS on tax credits. Firstly, the Earned Income Tax Credit offers significant reductions to people who earn a low or mid-level income.
The amount of reductions is dependent on the level of income and the family size. For example, if a family has three or more kids, the maximum tax credit reduction they can get is $6,728. This amount has increased by $68 compared to last year for all those people who file single, widowed, head of household, or have an income equal to or less than $51,464.
There is also a Saver’s Credit which pays around $1,000 to each individual to encourage them to contribute to their retirement. This reduction is also for low and mid-level income earners. If you contribute to an IRA or a 401(k) or another similar retirement account, you can save your tax credits by ten, twenty, or fifty percent, up to a maximum amount of $2,000.
If you have high-deductible health insurance, you can save money and set it aside for future healthcare expenses, bearing in mind certain limits. For instance, with a self-only health insurance policy, you can contribute to a HAS, but the minimum annual deductible must be $1,400, and the maximum contribution can be $3,600.
For family policies, the maximum contribution amount is $7,200, and the minimum annual deductible must be $2,800.
For people who are 55 years old or more, they can catch up to their contributions up to $1,000, but the maximum out-of-pocket expenses have to be $7,000 for self-only policies and $14,000 for family policies.
To find out more about tax planning and preparation, contact us at Advance Tax Defense and Accounting. We’re a tax accounting firm based in Palm Springs, and we offer tax debt relief services along with accounting, bookkeeping, tax solutions, and more. Book an appointment today.