You hopefully already know that limits on certain retirement accounts tend to rise each year to account for inflation — and 2021 will be no exception to that, as we recently reported.
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But these are not the only limits that the IRS imposes or oversees that tend to increase annually. Limits on certain federal income tax credits also tend to rise each year to account for inflation.
The IRS recently announced that the following credits are among those for which limits will rise for tax year 2021 — the one for which your tax return is due by April 2022.
Saver’s credit
Also known as the retirement savings contributions credit, this tax break is for folks who save money in certain types of retirement accounts — including 401(k) plans and individual retirement accounts (IRAs) — and who are otherwise eligible for the credit.
Income limits: For 2021, you might be eligible for this credit if your adjusted gross income, or AGI (found on your tax return), is not more than:
- Married filing jointly: $66,000 (up from $65,000 for 2020)
- Head of household: $49,500 (up from $48,750)
- All other tax-filing statuses: $33,000 (up from $32,500)
Credit limits:
The maximum amount that the saver’s credit could be worth remains $2,000 for folks whose tax-filing status is married filing jointly and $1,000 for those with any other tax-filing status.
To learn more: Check out “This Overlooked Retirement Tax Credit Gets Better in 2021.”
Earned income credit
This tax credit is for eligible workers. More specifically, it’s for folks with earned income, such as wages, as opposed to income from investments.
Unlike the saver’s credit, the earned income tax credit (EITC) is refundable. That basically means it not only reduces your tax bill, but it also might result in you receiving a tax refund or a receiving a bigger refund than otherwise.
Income limits:For 2021, you might be eligible for the earned income tax credit if your AGI is not more than:
- Married filing jointly: $21,920 to $57,414, depending on whether and how many of your children qualify for the credit (up from $21,710 to $56,844 for 2020)
- All other tax-filing statuses: $15,980 to $51,464, depending on whether and how many of your children qualify for the credit (up from $15,820 to $50,594 for 2020)
Credit limits:
For 2021, the maximum amount that this credit is worth ranges from $543 (if you have no qualifying children) to $6,728 (if you have three or more qualifying children). Those amounts have increased from $538 and $6,660, respectively, for 2020.
To learn more: Visit the “Earned Income Tax Credit” page on the IRS website.
Adoption credit
This tax break is for qualified expenses associated with the legal adoption of a child, such as adoption fees, court costs and legal fees.
Income limits: For 2021, the full value of the adoption credit is available to eligible taxpayers with a modified AGI (found on your tax return) of up to $216,660 (up from $214,520 for 2020). The credit is not available at all to those earning $256,660 or more (up from $254,520 for 2020). Eligible taxpayers with a modified AGI of more than $216,660 but less than $256,660 can take advantage of the adoption credit in part but not in full.
Credit limits: The adoption credit is worth up to $14,440 for 2021 (up from $14,300 for 2020).
To learn more: You can use the IRS’ Interactive Tax Assistant, which is a free online tool, to determine if you are eligible for the adoption credit.
Lifetime learning credit
This education credit is for qualified tuition and related expenses for eligible taxpayers who are enrolled at an eligible education institution.
“This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills,” the IRS explains.
Income limits: For 2021, the full value of the lifetime learning credit is available to eligible taxpayers with a modified AGI of up to $59,000, or $119,000 for a joint tax return (the latter of which is up from $118,000 for 2020). The credit is not available at all to those earning more than $69,000, or $139,000 for a joint tax return. Eligible taxpayers with a modified AGI of more than $59,000/$119,000 but not more than $69,000/$139,000 can take advantage of the lifetime learning credit in part but not in full.
Credit limits: The maximum value that the lifetime learning credit could be worth remains $2,000 per tax return.
To learn more: Visit the “Lifetime Learning Credit” page on the IRS website.
Other tax credits
The above credits are among the few federal income tax credits that have limits that tend to change each year, but they are not the only tax credits that Uncle Sam offers.
Other federal tax credits that are currently available include:
- Child tax credit
- Credit for other dependents
- American opportunity tax credit (an education credit)
- Credit for the elderly or disabled
It’s worth taking a moment to see if you might qualify for these or any other tax credits, as they would directly impact your tax bill. As we explain in “3 Key Questions Every Taxpayer Must Answer“:
“A tax deduction lowers your taxable income, while a tax credit lowers your tax bill dollar for dollar.”
For example, a $1,000 tax deduction would lower your taxable income by $1,000 — which may or may not lower the amount of money you owe Uncle Sam — while a $1,000 tax credit would take $1,000 off the amount you owe.
For help determining whether you’re eligible for a given tax credit, check out the IRS’ Interactive Tax Assistant, which is a free online tool.
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Tax justice experts, accounting firms and corporations’ tax planning officers around the world are on the watch for a set of upcoming tax changes that could affect everything from digital services, to energy products and more.
In addition to new taxes already on the table, some also see 2021 as an opportunity to introduce policies that could help governments tackle economic issues exacerbated by the coronavirus pandemic, and reduce inequality.
The International Consortium of Investigative Journalists has asked international tax experts what changes they’re anticipating.
“In 2021, we expect to see a heated discussion about how to design the future tax systems at both the national and international levels,” Tove Ryding, policy manager at the European Network on Debt and Development, told ICIJ.
“These tax debates point to the very sensitive question of ‘who should pay the corona bill?’” Ryding said. “The extremely high levels of debt, as well as the fact that many billionaires and corporations have seen their wealth and profits grow to new highs during the COVID-19 crisis, only make this debate even more important and urgent.”
COVID-19 recovery
In 2020, global debt soared to more than $270 trillion due to governments and companies’ response to the COVID-19 pandemic, according to the Institute of International Finance. And the pandemic, with its ensuing impact on countries’ finances, is not over yet.
In such an economic context, “the immediate priority should be to support people during the crisis,” Stuart Adam, an economist with the Institute for Fiscal Studies in London, said.
The next steps should be “to stimulate recovery as needed and only in the longer term (well after 2021) to deal with the massive deficits and debts that are being built up,” Adam wrote in an email to ICIJ.
Each country will then have to choose the most appropriate policy to help with support, stimulus and deficit reduction. And tax policy is only one of the tools available, Adam said.
In Asia, for instance, Malaysia was one of the countries most praised for its response to the coronavirus, despite being in the middle of a political crisis at the beginning of the pandemic.
“2021 is a transition year from crisis to recovery,” for the country, Finance Minister Tengku Zafrul Abdul Aziz said, according to Maybank Investment Bank Research.
To raise much needed revenues to fight the health emergency, the Malaysian government is currently evaluating several measures, including the introduction of a tax on goods and services, former government adviser and Monash University Malaysia professor Jeyapalan Kasipillai said.
Multinational corporations and digital services
New 2021 S Class
“The big ticket item in 2021” is the digital tax reform plan at the Organisation for Economic Co-operation and Development, according to Rasmus Corlin Christensen, an economist at the Copenhagen Business School. And so is the global minimum tax scheme, he said.
More Foreclosures In 2021
After lengthy negotiations, the OECD ー which groups 137 countries and jurisdictions ー is expected to agree on new rules by next summer that would introduce a minimum level of corporate taxation worldwide and ensure that multinationals pay taxes regardless of their physical presence, including tech companies that provide digital services, like Google or Facebook.
Happy New Year Pray More In 2021 Gif
In a statement last October, the OECD acknowledged the need for a solution and said that, as a result of the pandemic, the public has been putting pressure on governments to ensure that multinationals “pay their fair share and do so in the right place.”
As the negotiations continue, tax justice watchdogs like Ryding will monitor whether the new rules will benefit small developing countries too.
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