New Tax Laws You Need to Know
As the end of the year approaches, it is time to start thinking about your 2021 tax return. The more you prepare, the more you can save on your taxes. Before tax prep, you need to have an understanding of the tax laws for the current year. Many changes have been made for the 2021 tax year.
Child Tax Credit
The American Rescue Plan that was put in place in March of 2021 provided an expansion of the child tax credit for the 2021 tax year. The amount of the credit moved from $2,000 to $3,000 for most children but up to $3,600 for children 5 years old and under. The extra amount is reduced for higher income families. Higher income families include $75,000 for single filers, $112,500 for head of household, and $150,000 for married couples filing a joint return.
The credit is fully refundable with the required $2,500 of earned income dropped as well. Half of the 2021 credit will be paid in advance through monthly payments starting July 15th and ending December 15th. The other half of the credit can be claimed on your 2021 tax return. You could also opt out of the monthly child tax credits to claim the full credit on your tax return, resulting in a larger refund.
Tax Bracket Ranges
While the income tax rates did not change for 2021, the income tax brackets are wider than they were for 2020. Be sure to check the tax brackets to see if you have been bummed up or lowered. This could have a major impact on your tax liability.
The requirements for required minimum distribution for retirees were loosened in 2020 but are back in 2021 for anyone age 72 or older. Many limits on retirement plans are the same for 2021. The maximum limits for 401(k), 403(b), and 457 plans is $19,500, with a catch-up of $6,500 allowed for people born before 1972. The cap on Simple IRA contributions stays at $13,500, with a $3,000 catch-up for people aged 50 and older. For traditional IRAs and Roth IRAs, the contribution limit stayed at $6,000 with the $1,000 catch-up contribution for people aged 50 and older.
Roth IRA income ceilings for contributions did change for 2021. The contributions phase out at $198,000 to $208,000 for couples and $125,000 to $140,000 for singles.
Long-term Capital Gains Tax Rates
While tax rates on long-term capital gains and qualified dividends did not change for the 2021 tax year. The income thresholds to qualify for the different rates were adjusted for inflation. For 2021, the 0% rate applies to individual taxpayers with taxable income up to $40,400, head of household with $54,100 in taxable income, and $80,800 of taxable income for joint returners.
The 20% rate starts at $445,851 taxable income for single filers, $473,751 taxable income for head of households, and $501,601 for joint filers.
The 15% rate is for filers between those taxable income levels for the 0% and 20% breakpoints.
If you are concerned with the new tax laws, reach out to us at Total Clarity Wealth Management. We can assist you with effective tax information that will potentially save you money when tax season arrives. Give us a call today to get started!
While the tax or legal information provided is based on our understanding of current laws, and has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice and should only be relied upon when coordinated with individual professional advice. Neither LPL Financial, nor its registered representatives, provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your own tax or legal counsel for advice.