7 Considerations for the 2021 Tax Year – Individual and Small Business Tax Breaks, Credits & Deductions When Filing in 2022

The 2021 tax year will be quite different from 2020 given the number changes made by Congress. These will likely have an impact on you due to the scale of updates, tax credits, deduction extensions, and expiring provisions related to Covid-19 response legislation.

This article will cover some of the main tax changes, so you don’t miss out on any of the major tax credits or deductions when filing your return in 2022. Ultimately, this is going to ensure you save more money and maximize your tax refund.

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Federal Tax Brackets and Taxable Income Ranges

Although the tax rates didn’t change, the income tax brackets for 2021 are a bit broader than for 2020. The change is due to the inflation adjustments that occurred between September 2019 to August 2020.

Tax RateTaxable Income (Single)Taxable Income (Married)Taxable Income (HoH)
10%$0 – $9,950$0-$19,900$0 – $14,200
12%$9,951 – $40,525$19,901- $81,050$14,201- $54,200
22%$40,526 – $86,375$81,051- $172,750$54,201 – $86,350
24%$86,376 – $164,925$172,751- $329,850$86,351- $164,900
32%$164,926 – $209,425$329,851- $418,850$164,901- $209,400
35%$209,426 – $523,600$418,851 – $628,300$209,401 – $523,600
37%+ $523,600+$628,300+$523,600
2021 Tax Brackets for Single, Married Filing Jointly, and Head of Household

Note that President Biden intends to increase the top tax rate to 39.6% starting in 2022 to pay for the Democrat’s social infrastructure bill (Build Better Back). This rate would be applied to taxable income more than:

  • $452,700 for single taxpayers
  • $481,000 for the head of household
  • $509,300 for married couples filing a joint return.

After 2022, the different bracket limits will be adjusted for inflation as usual and you can see the potential changes in this article.

Tax Impacts Stemming From the Consolidated Appropriations Act (CAA)

At the close of 2020, the Consolidated Appropriations Act (CAA) became law when signed by then President Trump. This bill’s passing affected several included tax provisions that change how taxpayers will prepare their taxes for another year.

The act includes many extensions of expiring deductions and credits, extensions, and expansions of certain tax relief provisions offered as a portion of the federal response to the coronavirus.

In addition to the many contained items, the law:

  • Provides $600 advance payments (a.k.a as the second stimulus check) of a tax credit per taxpayer ($1,200 for married filing jointly) plus $600 for each eligible child. The credit starts excluding individuals at $75,000 of modified adjusted gross income. It also phases out at $112,500 for heads of household and $150,000 for married filing jointly
  • Allows businesses to continue deducting 100% of certain meal expenses
  • Maintains that personal protective equipment is a legitimate deductible expense for eligible teachers as a portion of the $250 qualified educator tax deduction
  • Grants an expansion of the $300 deduction for cash charitable deductions, when the taxpayer claims a standard deduction. This deduction is raised to $600 for joint filers
  • Specifies that gross income does not include an amount equivalent to any forgiven amount of a Paycheck Protection Program (PPP) loan. Those costs paid with forgiven PPP loans are completely deductible.

Recovery Rebate Credits

The American Rescue Plan Act gave US Taxpayers their third stimulus check, which is another advance tax credit like earlier stimulus checks in 2020. This round gave $1,400 to individuals with a further $1,400 for each dependent. As excited as many Americans were to receive their checks, some received a reduced credit or were excluded altogether such as:

  • joint filers with adjusted gross incomes above $150,000
  • head-of-household filers with an adjusted gross income (AGI) over $112,500
  • single filers with an adjusted gross income (AGI) of more than $75,000

Additionally, the third-round stimulus checks were decreased to zero if a taxpayer’s AGI was over $160,000 (joint filers), $120,000 (head-of-household), or $80,000 (singles).

Some individuals who were eligible for a third-round stimulus check didn’t receive a payment or got less than what they should have received. For those people, assistance may be available by way of a 2021 tax credit known as the recovery rebate credit. This can be claimed in your 2021 tax return if not paid as a “catch-up” payment by the IRS.

Additional Child Tax Credit (CTC)

If you can’t claim the full Child Tax Credit because you owe less than the credit, you could be able to receive the refundable Additional Child Tax Credit when filing your tax return in 2022.

Who can receive the Additional Child Tax Credit?

The Child Tax Credit (CTC) and the Additional Child Tax Credit (ACTC) are intended to assist working parents with low to moderate incomes. Due to this, families must have a minimum of $2,500 of earned income to claim the ACTC. Earned income can be defined using a variety of income sources. This includes salaries, wages, self-employment income, but also includes less common income like disability payments.

The credit excludes parents whose income comes exclusively from “unearned” income. Unearned income consists of interest and dividends, pensions and annuities, social security, unemployment, alimony, or child support.

As mentioned previously, the Consolidated Appropriations Act (CAA) was signed into law in December of 2020. The act was meant to offer relief to those impacted by the pandemic. For the tax year 2020, the CAA allows individuals to use their 2019 earned income if it was greater than their 2020 earned income in calculating the Additional Child Tax Credit (ACTC) as well as the Earned Income Tax Credit (EITC).

The Child Tax Credit and the Additional Child Tax Credit taper off eligibility for high-income taxpayers. Married couples with modified adjusted gross income (MAGI) greater than $400,000 and other filing statuses with modified adjusted gross income greater than $200,000 will have their credit reduced by $50 for each $1,000 or part of $1,000 that their modified adjusted gross income exceeds those amounts.

To obtain the Additional Child Tax Credit, your child must have a Social Security number. If they don’t have a Social Security number, you can’t use the child to claim the Additional Child Tax Credit.

Unemployment Compensation Tax Exemption

The American Rescue Plan Act allowed unemployment compensation to be exempt from federal income tax. For single tax filers, it allowed $10,200 of unemployment compensation to be exempt. It also allowed $20,400 for married couples, who filed jointly, exempt from federal income tax for households. This applied to those with an adjusted gross income less than $150,000, the IRS delivered reimbursements to people who filed their tax returns prior to the exemption being enacted.

Regrettably, the exemption is only related to unemployment compensation taken in 2020. So, for 2021, the government will again fully tax unemployment compensation in the same way it does with wages. You can see more around the unemployment exemption and FAQs in this article (link)

Changes to Retirement Plan Minimum Distributions (RMDs)

The CARES Act allowed people affected by COVID-19 to withdraw up to $100,000 of retirement funds without sustaining the typical 10% early withdrawal penalty. Further, the legislation also relaxed requirements for retirees to take mandatory minimum distributions (RMDs) from their retirement plans.

Many people were wondering if the RMD distribution would continue for 2021 tax filings. Unfortunately, the answer is no as this was  not a permanent change. This penalty waiver and the relaxed rules around RMDs only relates to 2020 unless restructured by new legislation from Congress.

As a result, anyone age 72 or older must take their RMD as of Dec 31, 2021 to avoid the 50% penalty―unless this is their first RMD, in which case they have until April 1, 2022. 

Note: Roth IRAs aren’t subject to RMDs.

Earned Income Tax Credit (EITC) Tax Considerations

Additional employees and laborers without qualifying children will be able to obtain the earned income tax credit (EITC) on their 2021 tax return. This expansion includes both younger and older Americans. For 2020 tax returns, the maximum EITC was $538 to $6,660. This range was conditional on income and the number of children for the filer.

Previously, single, joint filers, and married filers had to meet this criterion to receive the credit on 2020 tax returns.

  • Single: earned income & adjusted gross income must be $15,820 or less
  • Joint Filer: earned income & adjusted gross income must be $21,710 or less
  • Married: Allowed to be up to $56,844 and still receive credit

If the individual didn’t have a qualifying child, the filer had to be between 25 and 64 years old by year’s end to receive the EITC.

The American Rescue Plan’s Temporary Effects on the EITC

The American Rescue Plan expanded the 2021 EITC for childless workers in a few ways:

  • Lowers the minimum age from 25 to 19 (except for certain full-time students).
  • Removes the maximum age limit of 65. This allows older people without qualifying children the ability to claim the 2021 credit.
  • The maximum credit available for childless workers is also increased from $543 to $1,502 for the 2021 tax year.
  • Expanded eligibility rules for former foster youth and homeless youth

As with the 2020 EITC, you can also use your 2019 earned income as a substitute for your 2021 income if that will improve your credit amount.

Permanent EITC Benefits starting in the 2021 tax year

The enhancements described above are only for the 2021 tax year. However, there are also some permanent EITC changes that take effect in 2021. For instance, workers who otherwise wouldn’t be able to claim the credit because their children won’t meet the identification constraints can now claim the childless EITC. Certain married but separated couples can now claim the EITC on separate tax returns, too. The limit on a worker’s investment income is also increased from $3,650 (for 2020) to $10,000 (adjusted for inflation after 2021).

Income Qualification ItemNo ChildrenWith 1 ChildWith 2 ChildrenWith 3+ Children
1. Max. 2021 Earned Income Tax Credit Amount$1,502$3,618$5,980$6,728
2. Earned Income Base Amount required to get maximum credit$9,820$10,640$14,950$14,950
3. Phaseout Threshold Amount Begins (for Single, SS, or HoH) $11,610$19,520$19,520$19,520
4. Income (AGI) Maximum When Credit Eligibility Ends (for Single, SS, or HoH) $21,430$42,158$47,915$51,464
5. Phaseout Threshold Amount Begins (for Married Filing Jointly) $17,550$25,470 $25,470 $25,470
6. Income (AGI) Maximum When Credit Eligibility Ends (for Married Filing Jointly) $27,380$48,108$53,865$57,414

In Conclusion

Understanding how the tax law is being updated is key to saving money and being prepared this tax season. Inflation adjustments have caused a slight widening of the tax bracket.

Additionally, the Consolidated Appropriations Act affected credits such as the EITC and the ACTC. Furthermore, many of the temporary changes like unemployment compensation not being taxed were discontinued for 2021 income.

Similarly, the suspension of the early withdrawal penalty for retirement plan distributions is also being dropped. Lastly, many taxpayers may have additional credits from the recovery rebate credit, which they can claim via their tax returns filed in 2022.

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