How to Prepare for Filing Your Individual 2021 Tax Return

Latina woman wearing pale pink sweater with calculator in hand prepares to file her personal and business taxes on her laptop computer at home.

NOTE: The Internal Revenue Service is expecting delays in accepting and processing 2021 tax returns and urges taxpayers to take extra caution and file accurate tax returns electronically.

As you gear up to file your 2021 tax return, you may be wondering where to start and what to expect. Similar to tax year 2020, you will likely find that filing for 2021 will be different than in past years.

To help you prepare, we’ve put together some first steps and new changes for the 2021 tax filing season, along with helpful resources you can use as you go to file.

Taking the First Step

The Internal Revenue Service suggests that the first step to filing your taxes is to gather all the necessary documents and records you will need.

You should have direct access to at least some of these records indefinitely, such as the social security numbers of everyone listed on the tax return and your bank account and routing numbers.

For other documents, you will need to rely on other organizations to send them to you, either electronically or through the traditional mail. These kind of documents typically include:

  • • W-2 forms – sent by your employer(s)
  • • 1099 forms – sent by your bank(s), issuing agencies and other payers
  • • 1095-A form – sent by Health Insurance Marketplaces for those enrolled in qualified plan
  • • Statements of annual giving – sent by charities/non-profits you have contributed to

In addition, the IRS sent out two official letters regarding 2021 tax provisions made due to the COVID-19 pandemic. Letter 6419 was sent to those who received advance child tax credit payments (see more about this below), and Letter 6475 was sent regarding taxpayers’ 2021 economic impact payment (stimulus) to help them determine their eligibility for the Recovery Rebate Credit (available for those who didn’t receive their full stimulus payments).

Changes for 2021 Tax Returns

There were multiple changes carried over or implemented during 2021 that may affect your return. While this is not a complete list, here are some of the significant changes to be aware of:

Advance Child Tax Credit Payments

For those with dependent children, you should have received advance child tax credit payments in 2021 (unless you opted out and notified the IRS that you did not wish to receive them). As mentioned above, the IRS sent Letter 6419 to all who received the advance payments.

The IRS advised that you keep the letter for your tax records, as you may need to refer to it when filing your 2021 tax return. For a list of frequently asked questions regarding this topic, click here.

Expanded Charitable Tax Deductions

Originally enacted through the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020, a deduction for charitable donations is available to all taxpayers, even those who do not itemize their deductions for their 2021 tax returns.

If you don’t plan on itemizing your deductions for 2021, you can still claim a limited charitable tax deduction for donations you made. The limit for this deduction is $300 for single filers and $600 for married individuals filing jointly.

No Tax Break for Unemployment Received in 2021

The American Rescue Plan Act, which was passed in March 2021, retroactively waived federal income tax on unemployment compensation received in 2020. Those who received unemployment, have an adjusted gross income of less than $150,000, and filed their 2020 tax return before the act was passed may have overpaid on their taxes. While many have been automatically refunded this difference, the IRS is still in the process of processing refunds for more complex tax returns.

However, this tax provision was not renewed for 2021 tax returns, which means if you received unemployment in 2021, you will still owe federal income tax on that amount.

Standard Deduction Increase and Tax Bracket Changes

The IRS makes regular adjustments to account for inflation, so for 2021, both the standard deduction amount and the tax bracket levels were increased as follows:

  • • Standard Deduction
  • – Increased to $25,100 (up $300 from 2020) for married filing jointly
  • – Increased to $12,550 (up $150 from 2020) for single or married filing separately
  • – Increased to $18,800 (up $150 from 2020) for head of household
  • • Tax Brackets
  • – 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly)
  • – 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
  • – 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
  • – 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
  • – 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
  • – 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
  • – 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).

Other Factors to Consider Before Filing

What is My Filing Status?

Your filing status will likely stay the same from year to year, but major life changes like marriage or significant changes in income could warrant a change in your filing status. Examples of different filing statuses are:

  • • Single
  • • Married filing jointly
  • • Head of household

You can use this free IRS tool to find which filing status will result in the lowest amount of tax owed for you.

Should I Prepare My Taxes Myself or Get Help?

Of course, you’re the only one who can come up with the right answer for your unique situation, but it helps to know your options. You can:

  • • Prepare your return yourself. You can find forms, resources and more on the IRS tax website.
  • • Use tax filing software. There are multiple options available, such as TurboTax, H&R Block and TaxSlayer.
  • • Hire a tax professional. From CPA offices to individual tax preparers, you can find options in your local area using this IRS Tax Return Preparer Directory.
  • • Utilize free tax return filing services. The IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs provide free tax help to qualified individuals. Learn more here.

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Disclaimer: This material was put together for informational purposes only and does not provide tax, legal, accounting or other professional advice.

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