Guidebook icon with text, 2021 tax guide

Alongside visiting the dentist or cleaning the garage, filing taxes may not be your favorite activity— but pouring over paperwork and wrangling receipts is an annual necessity.

This year, a few factors make filing taxes in 2021 (for tax year 2020) a little different from previous seasons and could impact what you may owe or how big of a refund you may get.

Here’s what you need to know.

1. 2021 Tax Deadline Changes for Filing
2. Federal Income Tax Brackets for 2021 Tax Season
3. Standard Deductions and Credits for Filing in 2021
4. COVID-19 Tax Impact
5. If you’re new to filing taxes…

Tax Deadline Changes for Filing in 2021

Ordinarily, you have until April 15 to file federal and state taxes. But this tax season the federal tax deadline moved to May 17, 2021 for individual taxpayers — a move that not only gives you additional days to complete your return, but also more time to make contributions to qualified accounts, like an Individual Retirement Account (IRA). Doing so can help lower your overall tax bill.

Note that individual states can still require you to submit your income tax return by the April deadline. Check with your state tax agency to find out when yours is due.

Federal Income Tax Brackets for 2021 Tax Season

A tax bracket is a range of incomes subject to a certain tax rate, determined by filing status and taxable income for the year.

Federal Income Tax Brackets

Here’s a look at how the federal tax brackets stack up this tax season, based on 2020 income and filing status:

Single Filers

Tax rate Federal income tax bracket Tax owed
10% $0 to $9,875 10% of taxable income
12% $9,876 to $40,125 $987.50 plus 12% of the amount over $9,875
22% $40,126 to $85,525 $4,617.50 plus 22% of the amount over $40,125
24% $85,526 to $163,300 $14,605.50 plus 24% of the amount over $85,525
32% $163,301 to $207,350 $33,271.50 plus 32% of the amount over $163,300
35% $207,351 to $518,400 $47,367.50 plus 35% of the amount over $207,350
37% $518,401 or more $156,235 plus 37% of the amount over $518,400

Source: NerdWallet

 

Married Couples Filing Jointly

Tax rate Federal income tax bracket Tax owed
10% $0 to $19,750 10% of taxable income
12% $19,751 to $80,250 $1,975 plus 12% of the amount over $19,750
22% $80,251 to $171,050 $9,235 plus 22% of the amount over $80,250
24% $171,051 to $326,600 $29,211 plus 24% of the amount over $171,050
32% $326,601 to $414,700 $66,543 plus 32% of the amount over $326,600
35% $414,701 to $622,050 $94,735 plus 35% of the amount over $414,700
37% $622,051 or more $167,307.50 plus 37% of the amount over $622,050

Source: NerdWallet

 

Married Couples Filing Separately

Tax rate Federal income tax bracket Tax owed
10% $0 to $9,875 10% of taxable income
12% $9,876 to $40,125 $987.50 plus 12% of the amount over $9,875
22% $40,126 to $85,525 $4,617.50 plus 22% of the amount over $40,125
24% $85,526 to $163,300 $14,605.50 plus 24% of the amount over $85,525
32% $163,301 to $207,350 $33,271.50 plus 32% of the amount over $163,300
35% $207,351 to $518,400 $47,367.50 plus 35% of the amount over $207,350
37% $311,026 or more $83,653.75 plus 37% of the amount over $311,025

Source: NerdWallet

 

Head of Household

Tax rate Federal income tax bracket Tax owed
10% $0 to $14,100 10% of taxable income
12% $14,101 to $53,700 $1,410 plus 12% of the amount over $14,100
22% $53,701 to $85,500 $6,162 plus 22% of the amount over $53,700
24% $85,501 to $163,300 $13,158 plus 24% of the amount over $85,500
32% $163,301 to $207,350 $31,830 plus 32% of the amount over $163,300
35% $207,351 to $518,400 $45,926 plus 35% of the amount over $207,350
37% $518,401 or more $154,793.50 plus 37% of the amount over $518,400

Source: NerdWallet

Standard Deductions and Credits for Filing in 2021

When prepping your tax return, it pays to know the difference between tax deductions and credits, and which you’re eligible to claim.

Tax Credits

Tax credits directly lower your tax bill. For example, if you owe $1,000 in taxes and qualify for a $1,000 credit, the credit can zero out your tax liability. Some, like the Child Tax Credit, are refundable, meaning if the credit amount exceeds what you owe in taxes, you receive the difference in your refund.

Tax Deductions

Tax deductions reduce the amount of income that’s subject to tax. They can be above-the-line (used to calculate your adjusted gross income (AGI) or below-the-line (deducted after AGI is calculated). Above-the-line deductions include things like IRA contributions and student loan interest. Below-the-line deductions are itemized deductions you claim on the Schedule A tax form.

Standard Deductions vs. Itemized Deductions

The standard deduction is a flat dollar amount you deduct based on your filing status.

Standard Deductions

Filing status 2020 tax year
Single $12,400
Married, filing jointly $24,800
Married, filing separately $12,400
Head of household $18,650

Source: eFile

Itemized deductions are those you can take for individual expenses, like mortgage interest, charitable deductions or qualified medical expenses. These vary based on your own financial situation from year to year.

Running the numbers through a tax deduction calculator can help you decide if you’ll benefit more from claiming the standard deduction versus itemizing or vice versa.

COVID-19 Tax Impact

If you received any type of federal aid in 2020 related to the coronavirus pandemic, it could affect your tax filing.

Stimulus Checks

If you received a stimulus check, it does not count as taxable income and won’t reduce your refund or increase your tax bill for the 2020 tax year. If you didn’t get a stimulus check in 2020 but you’re owed one, you can get it when you file your return by claiming the Recovery Rebate Tax Credit.

Unemployment Benefits

Ordinarily, unemployment benefits count as taxable income. But if you received benefits for the 2020 tax year, you’ll get a break on your return in the form of a tax waiver due to federal COVID-19 relief.

This means you do not have to pay taxes on the first $10,200 in unemployment benefits if you’re a single filer with an AGI less than $150,000. This amount doubles to $20,400 for married couples filing jointly as long as they’re under the $150,000 AGI threshold.

Retirement Plan Early Withdrawals

The CARES Act allowed you to take distributions of up to $100,000 from a qualified retirement plan through December 31, 2020 without the 10% early withdrawal penalty.

Income tax still applies to those withdrawals, but the Internal Revenue Service (IRS) is allowing up to three years to repay any early withdrawals you took under CARES Act rules. And if you repay the distribution, you can amend future tax returns and the money you paid in income tax will be refunded.

Student Loan Forbearance

In March 2020, the CARES Act allowed those with federal student loans to temporarily pause payments without accruing interest (aka loan forbearance). This provision has been extended through September 30, 2021. If you paused payments in 2020, keep in mind you may have less student loan interest you can deduct on your tax return than you might have in the past.

New to Filing Taxes in 2021?

Here’s what to expect if you’re brand-new to filing income taxes.

The Basics

You might be thinking, “Why file tax returns?” It’s simple: Failing to file or not paying taxes owed can trigger a tax penalty or in extreme cases, the IRS could place liens against your property or file charges.

The IRS offers an online tool you can use to determine if filing a federal tax return is necessary for you.

Speaking of filing status, you can choose from: Single, head of household, married filing separately, married filing jointly or qualifying widow/widower with a dependent child.

If you’re unmarried and don’t have kids, it’s likely your filing status is single. If you’re married, weigh whether filing joint or separate returns makes more sense based on your incomes and the deductions or credits you hope to claim.

What do I need to file my taxes?

Let’s cover the common forms involved.

Form W-4: aka Employer’s Withholding Certificate. You fill this out at work telling your employer how much to withhold in taxes each payday. The IRS offers a tax withholding estimator that can help you choose the right amount of withholdings to enter so you don’t overpay or underpay taxes.

Form W-2: A summary of your earnings and tax withholdings for the year. You should get one of these from your employer. The IRS requires these forms to be mailed by the end of January each year.

Form W-9: If you’re an independent contractor, self-employed or a freelancer, clients may ask for a W-9 to report how much they paid you to the IRS.

Form 1099-DIV: Form provided by financial institutions to investors who earned any dividends or distributions from their investments during the year.

Reporting Investment Income

Money made from dividends or investment profits is subject to tax. But tax implications vary depending on how long you’ve owned the asset before selling. And certain strategies, like tax-loss harvesting, can help you lower your investment tax bill.

Steps to file taxes

You can collect your paperwork (W-2s, receipts for deductible expenses, etc.) and take it to a tax professional, who can get your tax return in order and file for you, in exchange for a fee.

Or, if you feel comfortable doing taxes on your own, you can prepare both your federal and state tax returns using an online tax filing program or by hand using paper and pencil. If you qualify, the IRS Free File program lets you file taxes for free.

While the DIY option is cheaper than hiring a tax pro, it may be more time consuming if you’re not well-versed in filing taxes.

Tax refunds or tax bills

Once completed, you’ll see whether you owe a tax bill or you’re due a refund. If you’re getting a refund, direct deposit is the fastest way to get the money. The IRS aims to send refunds within 21 days of a tax return being approved.

If you owe taxes, pay those by the tax filing deadline to avoid penalties and interest. If you owe a large sum of money to the IRS, you can set up an Installment Agreement, which doesn’t prevent penalties and interest from accruing but it gives you time to pay the IRS what you owe without fear of a lien or other consequences.

Filing taxes doesn’t have to be complicated

Getting your tax return together shouldn’t be a hassle. By knowing what you need beforehand, you can knock this off your to-do list in an afternoon (or faster).

Want to max out your IRA contributions for the 2020 tax year?

Invest in Your Future With Ally

This information is not, nor should it be, considered tax advice. We recommend that you consult with your tax advisor or other tax professional regarding any tax matters.