It’s that time of the year again: 2020 is coming to a close, and you can start planning for a prosperous 2021. To give you a head start, here’s something that will make you feel good about your tax return: Standard deductions are increasing for 2021!
Tax deductions lower your taxable income, and the less you pay in taxes, the more money you can keep in your pockets. If you’re trying to identify a simple way to maximize the benefits of the tax code, the 2021 standard deduction amounts are another treat to add to your tax checklist.
Choosing the right option
The IRS gives you two options on deductions for your tax return: standard or itemized deductions. Since you can’t get both deductions in the same year, your goal is to choose the one that is more beneficial to you.
Due to the decrease in itemized deductions available to taxpayers, the standard deduction has been the more popular choice since the implementation of the Tax Cuts and Jobs Acts of 2017. It’s a pre-determined amount set by the IRS every year based on filing status and allows you to bypass the tedious record-keeping required of taxpayers who itemize. Standard deductions are the obvious choice for those who don’t have many qualified expenses: There’s less time and paperwork required.
If you’re low on medical expenses, charitable contributions, home mortgage interest, and other qualified expenses for the year, taking the standard deduction is usually your better bet.
2021 standard deductions are a bit sweeter
The standard deductions for 2021 come with a boost that will lead to more tax savings. If your standard deduction is more than the total of your itemized deductions, don’t sulk over charitable contributions you won’t be able to deduct; enjoy the standard deduction instead.
Here are the 2021 basic standard deduction amounts (for individuals under age 65) for taxes due by April 2022.
|Filing Status||2021 Tax Year||2020 Tax Year|
|Single or married filing separately||$12,550||$12,400|
|Married filing jointly or qualifying widower||$25,100||$24,800|
|Head of household||$18,800||$18,650|
If you can be claimed as a dependent on someone else’s return, the rules are the same as they were in 2020. The 2021 standard deduction for dependents is $1,100 or the sum of earned income plus $350 — whichever is greater. Remember: The total standard deduction claimed for dependents cannot be higher than the basic standard deduction for your filing status.
There’s an extra deduction amount available if you’re 65 or over or blind. For single or head-of-household filers in this category, the additional standard deduction for 2021 is $1,700 (up from $1,650 in 2020). For married taxpayers 65 or over or blind, an additional $1,350 is available in 2021 (up from $1,300 in 2020). For anyone who is both blind and at least 65, the additional deduction amount is twice as much.
A breakdown of the benefits
Let’s say you are a single filer with adjusted gross income of $25,000. Because the 2021 standard deduction is $12,550, you can remove that amount from your income and only pay taxes on $12,450.
For married individuals filing jointly, you can deduct an even greater amount from your income: $25,100 in 2021. If your combined taxable income is $40,000, you can subtract the standard deduction and only pay taxes on $14,900.
Don’t take it for granted
Usually, the standard deduction isn’t touted as a huge benefit because it naturally happens if you don’t itemize your taxes — just make sure you don’t fall into the category of ineligible taxpayers. That list of disqualified taxpayers in any year includes a married individual filing separately whose spouse itemizes deductions; a nonresident alien or dual status alien (certain exceptions apply); an individual who may have filed a return for a period of less than 12 months; or an estate, trust, common trust fund, or partnership.
If you qualify for the standard deduction, it’s something to feel good about. Anytime you get to pay less taxes, and enjoy more of your hard-earned money, it’s worth celebrating!
View more information: https://www.fool.com/investing/2021-standard-deductions-are-better-than-ever/