Update on tax laws for the year 2021

Has the standard deduction or itemized deduction rules changed for the tax year 2021?

Update on Tax Laws for the Year 2021

As we enter the new year, it is important to familiarize ourselves with the latest changes in tax laws. Here is a quick overview of what to expect for the year 2021.

Standard Deduction Increase

The standard deduction for individuals and married couples filing separately will increase to $12,550 in 2021. For heads of household, the standard deduction will increase to $18,800, and for married couples filing jointly, the standard deduction will increase to $25,100. These increases will allow more taxpayers to take advantage the standard deduction and reduce their taxable income.

Increased Contribution Limits for Retirement Accounts

The contribution limits for many popular retirement accounts have increased for 2021. The maximum 401(k) contribution limit for employees will increase to $19,500, while the catch-up contribution limit for employees aged 50 and over will remain at $6,500. The contribution limit for Traditional and Roth Individual Retirement Arrangements (IRAs) will also increase to $6,000, with a catch-up contribution of $1,000 for those aged 50 and over. These increased limits enable taxpayers to save more towards retirement while potentially lowering their tax bills.

No More Alimony Deduction

For divorces and separation agreements signed after December 31, 2018, alimony is no longer deductible for the spouse making the payments. Likewise, the recipient of the payments no longer has to report them as taxable income. This change can significantly affect those going through divorce or separation agreements during 2021 and beyond.

Remote Work and Taxes

Due to the COVID-19 pandemic, many people have been working remotely since mid-March 2020. This has implications for their tax home and state income tax obligations. Some states have issued guidance stating that employees working remotely because of COVID-19 will not be liable for state income taxes in the state where their employer is located. For example, New York and New Jersey have both issued orders stating that their residents who are required to work from home for their employer outside the state do not have to pay state income tax for that period of time. However, it is important to check with a tax professional to determine the specific rules that apply to each individual taxpayer.

The Bottom Line

Understanding the latest updates in tax laws is important for all taxpayers as the tax laws can significantly affect their financial circumstances. These changes range from increased contributions for retirement accounts to changes in deductions and income tax obligations. It is advisable to seek advice from a tax professional in order to make the most of all eligible deductions and credits to reduce your taxable income for the year 2021.

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