Tax Planning for 2021: What You Need to Know

There are only two months left to prepare and plan for your 2021 tax filings. At Sherman & Associates, we want to make this process as simple and painless as possible. So, here’s what you need to know as you are getting ready to finish up the 2021 tax year.

The Child Tax Credit Has Changed

The Tax Cuts and Jobs Act changed the child tax credit. Specifically, it increased the amount of the credit to as much as $2,000 per dependent child (up to the age of 16). It also set the income limits to receive this credit at $200,000 if you file single or $400,000 if you file joint.

The child tax credit was also modified by the American Rescue Plan Act. If you earn less than $75,000 as a single filer or $150,000 when filing jointly, the changes under this act are as follows:

• The age limit for dependents is increased from 16 to 17
• The credit for children aged 6-17 increases from $2,000 to $3,000
• The credit for children 5 and under increases up to $3,600 per child

Tax filers earning more than the $75,000 (single) or $150,000 (joint) retain the previous child tax credit, which was $2,000 per child. There are also credits available for dependents if your child doesn’t qualify for a child tax credit. We can help identify the tax credits available based on your specific situation.

Standard Deductions Have Increased Slightly

In addition to changing the child tax credit, the Tax Cuts and Jobs Act also increased the standard deduction allowed when filing your 2021 taxes, albeit slightly. This deduction is:

• $12,550 if you file single or married but separate
• $18,800 for single heads of household
• $25,100 for married couples filing jointly

401(k) and IRA Contribution Limits Are the Same as 2020

If you contribute to a 401(k), you can put in up to $19,500 in 2021—the same amount as in 2020. One exception is if you are 50 or older. In this case, you can contribute an additional $6,500 if you wish.

Also the same as in 2020 is the amount you can contribute to your individual retirement account (IRA). Whether you put money into a traditional IRA or Roth, the maximum amount you can contribute in 2021 is $6,000. That is unless you’re 50 or older as you may be able to contribute an additional $1,000.

HSA Contributions Have Increased Dramatically

If your health insurance plan allows you to contribute to a health savings account (HSA), the amount you can put in has gone up dramatically. Individuals can now contribute up to $3,600 in 2021 and families up to $7,200, up from $50 and $100 respectively.

There are a few additional changes this year as well. Contact Sherman & Associates in Cookeville, Tennessee to learn more about how we can help you receive the maximum tax credits and deductions allowed in the 2021 tax year!