With a new year comes new tax changes—some of which were buried in the 5,593-pages of year-end legislation and might have slipped under your radar. Aside from COVID relief checks and enhanced unemployment benefits, these are some key tax changes you should know about.
Higher standard deductions
In your tax return, you have to take either a the standard or itemized deduction, which limits your taxable income—although most people take the standard deduction as it usually exceeds the savings they’d get from itemizing (it’s also easier to do). 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
The IRS released its annual round of inflation adjustments for next year, updating its income tax brackets for the 2020 tax year. Here are the revised brackets, per Kiplinger:
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)
More information on tax brackets can be found on the IRS website.
Flexible spending accounts
Your workplace flexible spending account (FSA) might no longer be strictly “use it or lose it”—the latest relief bill allows your employer to roll over funds into 2021 and 2022, if they choose to offer the option (read more about it in this Lifehacker post). 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.
Charitable deductions
Taxpayers can now qualify for a deduction of charitable monetary contributions up to $300 ($600 for joint filers) for 2021, even if you don’t itemize your deductions. For 2020, it’s $150 for single filing ($300 for joint filers).
Medical-expense deductions
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.
Business-meal deductions
For better or for worse, the “three martini lunch” is back—you can now get a 100% deduction for business-meal and beverage expenses in 2021 and 2022, a 50% bump from 2020. It applies to delivery and carryout meals, as well as those in restaurants.
This post published Jan. 7, 2021, and was updated on Jan. 8, 2021 to change the headline and correct the charitable contribution limits for the 2020 tax year.