Here’s what to know if you received child tax credit payments, collected unemployment, or had student loans forgiven in 2021.

Every year there’s a long list of tax changes that can affect the bottom line of your tax return and, it’s no surprise, that last year was full of tax changes.  Another year of grappling with coronavirus has led to significant tax law changes for the 2021 year, most may be in your favor while, for a few, changes may not be so favorable.

The good news is that there were some beneficial changes including the standard deduction and tax bracket increases to the expanded child tax credit, widened charitable deductions, and increased medical expenses deductions.

The bad news is that there are strict income limits for some benefits, unemployment income tax waivers have been canceled, and older taxpayers must restart Required Minimum Distributions from their retirement accounts.

While there’s a lot of tax legislation to keep track of, knowing the key changes could help you maximize your tax return this year. We pulled together a list of the 10 Tax Changes That Could Impact the Size of Your 2021 Tax Return including the most important tax law changes and adjustments for 2021 to help you when filing your 2021 tax return.

Expanded child tax credit

The much-needed new child tax credit allows working families to claim a tax credit for their children. In 2021, the American Rescue Plan also increased the amount families could claim per child. For tax year 2021, families can claim $3,600 per child under the age of 6 and $3,000 for children aged 6 and over (this only applies to the year 2021.) Previously this credit was $2,000 per child 16 or under, so it has increased significantly and is proving to be very beneficial for families. The credit was also made fully refundable, meaning the amount is refunded to the taxpayer regardless of how much the taxpayer’s liability is.

It is important to note that taxpayers who do not maintain a principal residence in the United states at least 6 months of the year are not eligible for the expanded credit, but may still be able to claim the regular child tax credit.

Earned income tax credit

Designed to benefit people with lower incomes, this tax credit can reduce your taxable income and wages. The American Rescue Plan expanded and increased this credit for the 2021 tax year.  By expanding and increasing the earned income tax credit, individuals with low income can look forward to reduced taxable income from salary income and reduced taxable wages for freelance income.

However, as with the expanded child tax credit, people who do not live in the U.S. at least 6 months of the year are not eligible to claim the earned income credit.

Unemployment benefits tax break

With the unexpected steep rise in unemployment due to the pandemic, a large part of the American population received unemployment benefits in 2020 and 2021.

The American Rescue Plan allowed a tax break for single filers who received $10,200 in unemployment benefits to be tax-free on the 2020 tax return. This year, the tax break has been discontinued. For tax filers this year, you will be fully taxed on the unemployment income received in 2021.

Increase for tax-deductible medical expenses

Medical expenses can be a real burden on many household budgets. With new allowances approved by Congress, you will now be able to deduct a higher dollar amount for your 2021 medical expenses.

Now you can deduct medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI). This is very good news for those with high medical expenses.

In other words, if you make $50,000, you can deduct qualifying medical expenses that exceed $3,750 for the 2021 tax year.

Standard deduction

This year the amount standard deduction has increased by $150 per individual. For your 2021 tax return, the amount you can decrease from your income before tax is applied is now $12,550 for single filers (an increase of $150) and $25,100 for married couples filing jointly (an increase of $300). For heads of households, the standard deduction is now $18,800 (an increase of $150). The increases of the standard deduction function as an adjustment for inflation. 

Income tax brackets

Due to the rise in inflation tax brackets were also raised slightly to account for inflation. With these small changes, if you were at the bottom of a higher tax bracket in 2020, you may be bumped down to a lower rate for your 2021 tax return.

To calculate your income bracket, count how much taxes you owe on your adjusted gross income (the money you make before income tax is removed), excluding tax deductions and itemized exemptions.

If you are head of household and married filing separately then you will see an increase in this rate as well.

Tax break for forgiven student loans

If you were lucky enough to get all or some of your student college loans forgiven in 2021, now you will receive an additional break. As of March 2021, all college loans that were forgiven will not be taxed as income. In other words, the amount you keep by not paying your monthly student loans will no longer be taxed as income. As of now, this new stipulation is only valid through 2025 but it could possibly get extended.

Charitable donations

Taxpayers eyeing a year-end charitable donation may take advantage of a special write-off for cash gifts in 2021, even if they don’t itemize deductions on their federal tax return. 

According to the IRS, for 2021 tax returns single filers may claim a tax break for cash donations up to $300 and married couples may get up to $600 as an extended coronavirus relief measure from 2020.

Since most Americans don’t have enough itemized write-offs to exceed the standard deduction it’s been difficult to claim the charitable deduction. However, the 2021 Charitable donation extension may offer a “nice tax break” for non-itemizers.

Required minimum distributions

Another change for 2021 is the return of Required Minimum Distributions (RMD’s) which was waived in 2020 as a response to the pandemic.

Required Minimum Distributions apply to individuals 72 years and above who have retirement accounts like 401(k)s and traditional IRAs. Once you reach this age you’re legally required to start making withdrawals from these tax-advantaged accounts which are then subject to income tax.

This means that if you’re over 72, you were required to make a withdrawal from your retirement account before the end of 2021. If you did not withdraw the required amount (see the IRS website to calculate your minimum requirement), you may owe a 50% penalty tax on the money you failed to withdraw. 

For example, if someone needed to take out $50,000 and skipped the distribution, they would owe a penalty of $25,000.

Health flexible spending accounts

The current tax-free contributions for a health flexible spending account (FSA) were $2,750 for 2020. But the good news is that this year the tax-free contribution amount has increased $100 to $2,850 per year.

BNC Tax specializes in U.S. tax preparation for Americans living abroad. We know how to navigate the complex issues that homeowners and business owners face when living abroad. Schedule a consultation with us today by making an appointment on our Appointment Calendar.