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As the saying goes, knowledge is power. Knowledge also comes in pretty handy at tax time, too.

A number of tax changes took place in 2021, partly as a result of the pandemic, inflation and other factors. Understanding what has changed and how these changes may affect your finances will help you be better prepared to file your 2021 return – while potentially helping you save on taxes as well.

Major Tax Changes for 2021

With the 2022 tax season underway, what are the most important changes, dates and tips to know as you prepare your 2021 return?

Let’s look at seven:

1. Tax Deadline

This year, the deadline for all federal tax returns and payments is Monday, April 18.

2. Standard Deduction

Remember, you have the option to itemize your deductions or claim the standard deduction. For tax year 2021, the IRS raised the standard deduction to adjust for inflation – it increased to $12,550 for single filers and $25,100 for married couples filing jointly. The table below shows standard deductions for the various filing statuses, compared to the previous tax year.

Standard Deduction Amount

Filing Status

2020

2021

Single

$12,400

$12,550

Head of Household

$18,650

$18,800

Married Filing Jointly

$24,800

$25,100

Qualifying Widow or Widower

$24,800

$25,100

Married Filing Separately

$12,400

$12,550

3. Income Tax Brackets

As they are every year, income tax brackets were also adjusted for inflation, increasing over tax year 2020. For 2021, the seven standard tax rates have not changed – instead, it’s the tax brackets within each rate that have shifted. This means you might fall into a different tax bracket for 2021 than you did in 2020. If you’re a single filing taxpayer, for example, then the 22% bracket in tax year 2020 was $40,126 to $85,525; for tax year 2021, it has increased to $40,526 to $86,375. The table below shows all 2021 rates and brackets.

2021 Tax Rates and Brackets

Rate

Married Filing Jointly

Single Filer

Head of Household

Married Filing Separately

10%

$19,900 or less

$9,950 or less

$14,200 or less

$9,950 or less

12%

Over $19,900

Over $9,950

Over $14,200

Over $9,950

22%

Over $81,050

Over $40,525

Over $54,200

Over $40,525

24%

Over $172,750

Over $86,375

Over $86,350

Over $86,375

32%

Over $329,850

Over $164,925

Over $164,900

Over $164,925

35%

Over $418,850

Over $209,425

Over $209,400

Over $209,425

37%

Over $628,300

Over $523,600

Over $523,600

Over $314,150

4. Impact of the Pandemic

The effects of the pandemic extend to your taxes. Two of the most important points to keep in mind have to do with stimulus checks and unemployment benefits.

Stimulus checks: Like millions of Americans, you might have received a stimulus check in 2021. These checks do not affect your tax situation or refund because they are not treated as taxable income, but rather as a refundable tax credit for 2021.

Unemployment benefits: In a change from 2020, when the government didn’t tax the first $10,200 of unemployment benefits, you are required to pay taxes on them for 2021. If you were unemployed last year, then be ready to pay taxes on the benefits you received if you did not have taxes withheld from them.

5. HSA and IRA Contributions

You have until the tax deadline to make health savings account (HSA) and individual retirement account (IRA) contributions, giving you a few additional months beyond the calendar year to direct money their way.

6. Tax Deductions and Credits

A great way to hold on to more of your dollars is through tax deductions and credits. Deductions help you lower the amount of income on which you can be taxed. Credits, which can be refundable or nonrefundable, are dollar amounts subtracted directly from the income taxes that you owe.

What’s the difference between refundable and nonrefundable credits? If your credits are refundable and higher than your tax bill, then you’re paid the difference in a refund. In the case of nonrefundable credits being more than your tax bill, they bring that bill to zero, but no refund is given.

Here are a few tax deductions and credits to consider.

  • Charitable deductions: For tax year 2021, taxpayers who itemize deductions are allowed to deduct up to 100% of their adjusted gross income (AGI) for qualified contributions – those made in cash to qualifying charitable organizations – made during the year. AGI is total gross income minus deductions already taken.

    If you claim the standard deduction, then you can still benefit. Typically, taxpayers who don’t itemize can’t claim a deduction for charitable contributions. For the 2021 tax year, however, you can deduct up to $300 per person and $600 for married individuals filing jointly. Whether you itemize or not, cash contributions to most charitable organizations qualify.

  • Medical deductions: Did you have large medical bills in 2021? You can deduct out-of-pocket medical expenses if they total more than 7.5% of your adjusted gross income. To do this step, you’ll have to itemize your deductions.
  • Earned Income Tax Credit: Low- and middle-income households can get tax relief through the Earned Income Tax Credit. This is a refundable tax credit that can save thousands of dollars depending on your filing status, income and number of children. Among the changes for 2021, more workers without children qualify, and at higher credit amounts.
  • Child Tax Credit: You may be among the many American families who received half of your Child Tax Credit in the form of monthly advance payments from July to December 2021. Claim the balance of the credit on your 2021 tax return. Note, however, that the advance payments were made based on your 2020 income. If your income increased in 2021 to where you began phasing out of the credit, then the payments you received may be more than you’re allowed, meaning you may have to pay back the excess.
  • Education credits: The American opportunity tax credit (AOTC) applies toward a student’s educational expenses for the first four years of higher education. The maximum annual credit tops out at $2,500 per student. As a partially refundable credit, if it lowers your tax liability to zero, then 40% of what remains (up to $1,000) will be refunded to you.

    While the AOTC is limited to undergraduate expenses, the Lifetime Learning Credit (LLC) applies to expenses for a wide range of educational opportunities. These include undergrad, graduate and professional degree courses, as well as technical classes and courses to improve job skills. The nonrefundable credit covers up to $2,000 in qualified expenses per return, and there is no limit on the number of years you can claim the credit.

7. Changes in 401(k) Contribution Limits for 2022

Good news on the retirement savings front: Maximum employee contributions to 401(k) accounts – and catch-up contributions for people aged 50 and older – have gone up for 2022, giving you the opportunity to save more for retirement. Here’s what you can contribute:

  • Employees can contribute up to $20,500, up from $19,500 for 2021.
  • If you are aged 50 or older, then you’re eligible for an additional catch-up contribution of $6,500, same as in 2021. You can make the contribution even if you don’t turn 50 until December 31, 2022.
  • The total employee and employer contribution limit is $61,000, with catch-up at $67,500. That contribution compares to $58,000 and $64,500, respectively, in 2021.

Stay Informed

Keeping up to date on tax and law changes – and making decisions based on how they will affect you – is important to your financial health. At tax time, it’s a good idea to consult with a tax professional to maximize your benefits. That’s especially true for tax year 2021, which saw many changes.

The KeyBank team stands ready to assist you for all your financial needs. Contact Key today.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.

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