In most years, there are small changes in the ways that people file their taxes. But the COVID-19 pandemic has caused the tax code to change more than usual in 2021. For this reason, there are several tax law changes that current and potential home owners need to know about, especially if you’re counting on a refund to put toward a down payment or to pay bills and improve your credit score.
These are the most common things you need to know about some of the planned phase-outs, changes and inflation adjustments that could affect your 2021 Tax return.
- Non-Itemized $300 Charitable Deduction: In tax year 2020, the IRS allowed taxpayers to deduct up to $300 in non-itemized charitable donations. In 2021, an extension of the $300 deduction for cash charitable deductions was granted, even if you claim the standard deduction. For 2021, the deduction is increased to $600 for joint filers. Taking advantage of deductions can lower your taxes &/or increase your refund.
- Tax Bracket Adjustments for Inflation: U.S. tax bracketshave risen this year. As a result, you may end up paying more in taxes or getting a smaller refund, even if your income hasn’t changed. The percentages of income taxes assessed in 2021 haven’t change, but income tax brackets, eligibility for certain tax deductions and credits, and the standard deduction have been adjusted to reflect inflation.(See below.)
- Employer-Based Student Loan Aid: The federal government has given businesses the option to pay up to $5,250 toward each employee’s student loans. In cases in which employers pay, neither businesses nor workers will be subject to federal payroll taxes on the amount paid. These student loan payments can go to the employee or directly to their lender. This tax benefit is available for federal and private loans. On December 22, 2021, the Biden Administration extended the pause on student loan payments, accrual of interest, and delinquency collections through May 1, 2022. Lowering your debt to income ratio (DTI) is important when applying for a mortgage loan.
- Retirees Can No Longer Avoid Withdrawing Required Minimum Distributions (RMDs): Rather than considering RMDs to be tax-exempt, in 2020 the legislation made them voluntary. If you were 70½ or older and did not need the additional income from RMDs, you did not have to withdraw them. The relaxed rules around RMDs only applied to 2020 unless they are reenacted by new legislation from Congress. You will have more income but may pay higher taxes.
- Increased Requirements for Itemized Deductions: Just because the standard deduction has increased does not mean that itemizing deductions is always a bad idea. If you made a major purchase in 2021, an itemized deduction might save you money. For instance, purchasing a home makes it possible to deduct the cost of some of the interest and fees from your mortgage.
*According to the IRS, the 2021 dollar amount adjustments described here generally apply to tax returns filed in 2022:
- The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
- The Alternative Minimum Tax exemption amount for tax year 2021 is $73,600 (up $700) and begins to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200).
- The tax year 2021 maximum Earned Income Credit amount is $6,728 for qualifying taxpayers who have three or more qualifying children, up from a total of $6,660 in 2020.
- For cafeteria plans that permit the carryover of unused medical flexible spending amounts, the maximum carryover amount is $550, an increase of $50. (See your company plan for more details on changes Medical Savings Accounts.)
- For tax year 2021, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $119,000, up from $118,000 for tax year 2020.
- Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000, up from a total of $11,580,000 for estates of decedents who died in 2020.
- The maximum credit allowed for adoptions for tax year 2021 is the amount of qualified adoption expenses up to $14,440, up from $14,300 for 2020.
*The tax information in this article is not to be considered legal advice. We have provided it, based on our sources, in order to help you better plan for how your 2021 tax return may have a positive or negative effect on your ability to purchase a home. Consult a tax expert when preparing your taxes and a licensed real estate agent when considering your financial options for home ownership.