12 Tips for 2021 Taxes

By Mitchell J. Smilowitz, CPA

As we wrap up 2021, it’s important to review your current tax situation and take any last-minute actions that can save you money. These 12 tips can get you started.

Pandemic Related Tax Provisions

The American Rescue Plan Act (ARPA), enacted in March 2021, included tax provisions that will impact you this filing season. Here are some areas to consider.

1. Economic Impact Payments (EIPs)

During the COVID-19 pandemic, the federal government issued three rounds of Economic Impact Payments to provide financial relief to individuals and families. If you did not receive one or more of these payments, you can still claim them.  Each of the three payments has slightly different conditions including income limits, citizenship and identification requirements. In general, income limits for the full payment are $75,000 for single filers, $112,000 for single head-of-households and $150,000 for those who are married and filing jointly. The payments gradually phase out for those with higher incomes, For more information on eligibility and how to apply, see Your Guide to Economic Impact Payments from the federal Consumer Financial Protection Bureau.

2. Child Tax Credit

ARPA expanded the Child Tax Credit. For 2021, the Child Tax Credit increases to $3,600 for a child under age 6 and to $3,000 for children ages 6-17. The tax credit is determined by the child’s age on December 31, 2021. You may have already begun receiving payments under the Child Tax Credit because the IRS began paying half of the credit in advance monthly payments beginning in July. To determine whether you qualify and the size of credit for which you are eligible, see the IRS User Guide: Child Tax Credit Update Portal.

3. Child and Dependent Care Tax Credit (CDCTC)

ARPA expanded the CDCTC for 2021. The CDCTC provides the taxpayer with a credit against federal income tax for child and dependent care expenses which are necessary for the taxpayer to be gainfully employed. For 2021 only, ARPA makes the CDCTC substantially more generous (up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons) and potentially refundable, so you may be able to receive the credit even if you do not owe any taxes. To learn more about the CDCTC, see the Child and Dependent Care Credit FAQson the IRS website.

4. Charitable Contribution Deductions

Individuals who claim the standard deduction can still deduct up to $300 ($600 for joint filers) for donations made in cash, check or credit card to charitable organizations.

5. Earned Income Tax Credit (EITC)

The EITC refundable tax credit is designed to support low- and some middle-income families. The EITC reduces the amount of tax owed. For 2021, the credit ranges from $1,502 to $6,728 depending on income, number of children and tax filing status. ARPA expanded EITC eligibility to children up to age 19, adults older than 65 and individuals without children. For more information, see the IRS Earned Income and Earned Income Tax Credit Tables.

6. Unemployment Compensation

In 2020, taxpayers could exclude up to $10,200 in unemployment compensation from income. This income tax exclusion is not available to those receiving unemployment compensation in 2021.

Additional Year-End Tax Strategies

7. Increase Your Contribution to Your JRB Retirement Account

Saving for retirement remains the #1 strategy for reducing your taxes. Not only do you lower your taxable income by the amount you contribute (up to federal maximums), your savings grow tax free in the plan. You only pay taxes when you withdraw your savings in retirement, when you will likely be in a lower tax bracket.

8. Itemize or Standard Deduction?

A few years ago, Congress nearly doubled the standard deduction. This made the standard deduction (see below) the best option for many more taxpayers. If you think you have sufficient deductions to itemize, it's useful to estimate your potential itemized deductions to determine whether itemizing makes sense for you.  If you are going to itemize, you will need to collect all your backup documents for your eligible expenses.

For 2021, the standard deductions are:

For Those Considering Itemizing

If your itemized deductions are close to exceeding the standard deduction, these three ideas may provide the boost you need for itemizing to make sense.

9. Bunch Medical Expenses

Medical and dental expenses are only deductible to the extent they exceed 7.5% of your adjusted gross income (AGI). If you're close to crossing the 7.5% threshold in 2021, move your purchases of eyeglasses, dentist and doctor visits, surgical procedures and other medical expenses to December to qualify for this tax deduction. Among the medical costs eligible for the deduction are LASIK eye surgery, doctor-prescribed weight loss programs, smoking cessation programs (but not patches or gum), and expenses for installing ramps, railings and other features needed to accommodate people with disabilities.

10. Educator Expense Deduction

Eligible educators can deduct up to $250 ($500 if married filing jointly and both spouses are eligible educators) of unreimbursed expenses for participation in professional development courses, books, supplies, equipment and supplementary materials used in the classroom. For more information, see the IRS Educators Expense Deduction website page.

11. Bunch Charitable Contributions

Making larger donations less often could allow you to accumulate deductions and itemize. For example, if a married couple filing jointly donates $15,000 per year to charity (assuming no other itemized deductions), they would not exceed the $25,100 standard deduction and would not receive a tax benefit for their donations. If they contribute $30,000 every other year, they would be able to itemize in the year they make the charitable donation. A Donor Advised Fund can be an effective tool for bunching charitable contributions.

Prepare for 2022

12. Review Withholding and Estimated Tax Payments

Be sure that you are withholding enough to satisfy your federal tax liability but not so much that you receive a large tax refund. Failure to withhold sufficient tax (or pay sufficient quarterly estimated tax) may cause you to owe tax with your return and to be subject to interest and penalties. Similarly, by withholding too much, you are making an interest free loan to the government. The IRS has published a simplified withholding estimator that can provide a rough estimate of overall withholding and income. By updating your Form W-4, your employer can adjust the amount withheld from your salary to cover any shortfall, avoiding potential underpayment penalties.

Tax law continued to evolve during 2021. The American Rescue Plan Act drove many of these changes. These 12 tax topics are a good place to begin thinking about your 2021 taxes, but this is not an exhaustive list. Discuss these provisions with your tax preparer to see if they apply to you or contact the JRB at 888-JRB-FREE (572-3733) or via email.

December 2021