Key Tax Changes for This Year
Before You Fill Out Your Return, Learn What’s New
Taxes aren’t stagnant. Rules, provisions, and earnings thresholds can shift slightly from year to year, and they usually do. The changes can happen to keep up with inflation, or due to new laws passed by Congress. The 2020 tax year—the tax return you’ll file in 2021—has been subject to its share of upheaval, so it can pay to get informed and begin preparing for it ahead of time.
Why Check for Tax Changes Every Year?
The Tax Code is designed to adjust periodically to keep pace with inflation, and it’s been that way for more than 35 years. Today’s dollar doesn’t have the same value as it did a year ago, so the Internal Revenue Service (IRS) allows for cost-of-living adjustments to offset “bracket creep”—taxpayers’ incomes inching steadily upward and pushing them into a higher tax bracket. The Tax Code indexes things like the standard deduction and other income thresholds to increase by roughly the same percentage as earnings do each year.
Action to Take: Learn What’s New
Let’s look at the standard deductions for the last three years as an example:
|Married joint filers||$24,400||$24,800||$25,100|
|Heads of household||$18,350||$18,650||$18,800|
The increases from 2020 to 2021 aren’t quite so generous as those from 2019 to 2020, and that makes sense. The American economy took a beating in 2020 due to the coronavirus pandemic.
You’ll want to be aware of a few other 2020-21 changes as well.
- You might be able to claim the Recovery Rebate tax credit that’s in place for the 2020 tax year if you didn’t receive a stimulus check or if you received less of a payment than you were rightfully entitled to.
- Further, for 2020, taxpayers can deduct up to $300 in eligible donations from their income even if they are among the vast majority who file their tax returns using the standard deduction. Under normal circumstances, you can only deduct charitable contributions if you itemize your deductions rather than use the simpler and more popular standard deduction. But a provision of the CARES Act pandemic relief bill changed the rules for this year; those who do not itemize can still deduct as much as $300 in cash donations made to qualifying charities before Dec. 31, 2020.
- The IRS additionally paid interest to taxpayers in 2020 on tax refunds resulting from their 2019 returns. You might not have received a windfall, but the IRS nonetheless requires that you claim it as income on your 2020 return.
The IRS offers a wealth of information on its website that should answer just about any question you have, if you enter a search for it. It also offers a “Newsroom” online that will notify you of any tax law changes that have taken effect, including inflation adjustments. The site also has a search tool to help narrow down your quest for information.
Next Steps and More Resources
Addressing year-to-year changes and their impact on your tax return doesn’t have to be an overwhelming challenge.
- Learn more about the IRS’ 2020 Inflation Adjustments.
- Get a detailed look at the entire process with The Ultimate Guide to Doing This Year’s Taxes.
- Learn How to Make Tax Filing Easier With a Recordkeeping System, so next tax season is even easier.