Some tax changes were buried in the 5,500+ pages of year-end legislation and might have slipped under your radar. These are some key tax changes you should know about.
Taxpayers now qualify for a deduction of monetary charitable contributions up to $150 ($300 for joint filers) even if you don’t itemize. And for next year the deduction doubles to $300 for single filers ($600 for joint filers).
The 7.5% threshold for claiming the medical expense deduction was set to increase to 10% of a recipient’s adjusted gross income for 2021, but the new legislation permanently lowers the threshold to 7.5%, giving Americans a break on the deductibility of out-of-pocket medical expenses.
Employer-paid student debt is tax free
The provision that allows employers to voluntarily pay up to $5,250 of an employee’s college loan during 2020 has been extended for five years. Both employers and employees are able to avoid federal payroll taxes on the money.
You can now get a 100% deduction for business-meal expenses in 2021 and 2022, a 50% bump from 2020.
Flexible Spending accounts (FSA)
Your FSA might no longer be strictly “use it or lose it” as your employer can elect to roll over funds into 2021 and 2022. Also, the annual limit on deductible contributions to an HSA in 2020 goes up $50 for individuals and $100 for families next year, bringing them to $3,550 and $7,100, respectively.
These last two items are part of the annual IRS adjustments which occur every year but are nevertheless important to know.
Higher standard deductions
In your tax return, you have to take either a the standard or itemized deduction, which limits your taxable income – most people take the standard deduction as it usually exceeds the savings they’d get from itemizing. For your 2020 return, the standard deduction has been increased:
Single filer: $12,400, up $200.
Married, filing jointly: $24,800, up $400.
Head of household: $18,650, up $300.
Raised income brackets
After accounting for your standard or itemized deductions, the remaining income will be taxed at these rate:
10%: Up to $9,875 (Married filing jointly: Up to $19,750)
12%: Between $9,876 – $40,125 (Filing jointly: $19,751 to $80,250)
22%: Between $40,126 – $85,525 (Filing jointly: $80,251 to $171,050)
24%: Between $85,526 – $163,300 (Filing jointly: $171,051 to $326,600)
32%: Between $163,301 – $207,350 (Filing jointly: $326,601 to $414,700)
35%: Between $207,351 $518,400 (Filing jointly: $414,701 to $622,050)
37%: Over $518,400 (Filing jointly: Over $622,050)
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