Your Guide To 2021 Tax Rates, Brackets, Deductions & Credits

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Each year, new tax rates are created, income thresholds are updated, and credits and deductions are renewed. Pay attention to these numbers early in the year to outline your tax strategy and make the most of any and all possible tax benefits.

Here’s a breakdown of the key tax elements affecting your 2020 and 2021 tax returns. Remember, you file your 2020 tax return in 2021 and your 2021 tax return in 2022.

 

Federal tax brackets & rates for 2020 & 2021

At the federal level, there are seven tax brackets that range from 10% to 37%. Each rate applies to its own tax bracket and is based on your filing status. You have four filing statuses to choose from: single, married filing jointly, married filing separately, or head of household.

The federal tax brackets are progressive. If you’re a single filer and your 2021 taxable income is $55,000, $9,950 is taxed at 10%. Then, income between $9,951 and $40,525 is taxed at 12%. The remaining amount between $40,526 and $55,000 is taxed at 22%.

Below are the tax rates for 2021 and 2020.

Single taxpayers

Married filing jointly taxpayers

Married filing separately taxpayers

Head of household taxpayers

Michigan tax rate for 2020 & 2021

In Michigan, there’s one tax rate that applies to all taxpayers, no matter your income or filing status. Michigan’s flat tax rate is 4.25%.

Simple compared to the federal system, right?

 

Deductions & limits for 2020 & 2021

When you claim a deduction, you subtract the deduction amount from your adjusted gross income (AGI). This reduces your taxable income. And, lower income means a lower tax bill.

Here are some key deductions that you might be able to claim in 2020 and 2021.

Standard deduction

You can take the standard deduction on your tax return or choose to itemize (list out) each of your eligible deductions. Taking the standard deduction is the simplest option. But, if you add up all your eligible deductions and find they’re greater than the standard deduction, it’s better to itemize.

Medical & dental expenses

Once your medical and dental expenses exceed 7.5% of your AGI, you can deduct them on your 2020 and 2021 tax returns, if you choose to itemize.

 

State & local taxes

In both 2020 and 2021, you can deduct up to $10,000 in state and local sales, income, and property taxes unless your filing status is married filing separately. In that case, you’re limited to a $5,000 deduction.

If you live in a high-tax state like California or Hawaii, this deduction might not be as helpful as in past years.

 

Home mortgage interest

If you take out a mortgage to buy, build, or renovate to improve your home, you can deduct the interest you pay on the mortgage.

In 2020, this deduction is limited to mortgage debt – or home acquisition debt – up to $750,000. If your status is married filing separately, it’s limited to debt up to $375,000. Typically, any interest that exceeds these amounts isn’t tax-deductible.

If your mortgage was created before the Tax Cuts and Jobs Act passed in 2017, it’s grandfathered in. Old deduction rules apply. In that case, you can deduct interest up to $1 million of mortgage debt plus an additional $100,000 of equity debt.

You have to itemize to claim this deduction, which may seem obvious because these amounts could be far greater than the standard deduction.

 

Charitable donations

Do you donate to public organizations? If so, you can deduct charitable cash donations up to 100% of your AGI in 2020 and 2021 – if you itemize. If you don’t itemize, you can claim a deduction for cash donations up to $300 for taxpayers filing single or married filing separately and $600 for those married filing jointly on your 2020 and 2021 returns. And you can still claim the standard deduction.

The CARES Act and Consolidated Appropriations Act, 2021 increased the AGI limit to 100% from 50% and created the $300 deduction. These changes are meant to incentivize charitable giving during the COVID-19 pandemic.

If you’re a big giver, stick with it and you’ll be rewarded. Make sure your donations count as a charitable donation though.

 

QBI deduction

The QBI deduction applies to taxpayers who receive qualified business income (QBI) from a pass-through entity. If that’s you, you can deduct 20% of your QBI.

This deduction is pretty complex, so make sure you know how it applies to you and whether your deduction is limited.

 

Student loan interest

If you paid interest on student loans in 2020 and 2021, you can deduct up to $2,500 of it on your tax returns. Phaseouts do apply and are based on your modified AGI.

This deduction may be less beneficial compared to previous years for government-run student loans. To provide relief to borrowers during the COVID-19 emergency, the interest was temporarily set at 0% and payments were suspended for most of 2020. This 0% interest rate and suspension of payments will last until Sept. 30, 2021.

 

Credits & limits for 2020 & 2021

Deductions reduce your taxable income, but tax credits directly reduce your tax bill – dollar for dollar. Some tax credits are refundable. In the case that your refundable tax credit is more than your tax bill, you get a check for the difference.

If it’s nonrefundable, it’ll reduce your tax bill to $0. Therefore, it’s important to know which ones you qualify for and how to claim them. You wouldn’t want to pay more taxes if you don’t have to, right?

 

Child tax credit

If you have children, you can deduct up to $2,000 per qualifying child in 2020. This credit is refundable up to $1,400. If you have other qualifying dependents, you can claim a $500 credit for each dependent who isn’t your child. This credit is subject to phaseouts starting at $400,000 for married filing jointly taxpayers or $200,000 for other taxpayers.

For 2021, the child tax credit increases to $3,000 for kids between six and 17 years old. The credit is $3,600 for kids under six. You’re eligible for the full amount if your income is under the following thresholds: $150,000 for joint filers/surviving spouses, $112,500 for heads of households, and $75,000 for all other filing statuses. The IRS will pay half the credit in advance via payments beginning in July 2021. Your credit amount will be based on your 2019 or 2020 tax return information – whichever is the most recent. The $500 credit for non-child dependents remains the same in 2021.

The American Rescue Plan Act of 2021 expanded this credit to offer additional relief to taxpayers affected by the pandemic.

 

Adoption credit

If you adopt a child, the maximum credit allowed in 2021 is the amount of qualified adoption expenses up to $14,400 – up from $14,300 for 2020. If you adopt a child with special needs, you can claim the full $14,400, regardless of your adoption expenses. Phaseouts do apply and are based on your modified AGI.

Qualified expenses, including adoption fees, attorney and court costs, travel expenses, and other expenses related to adopting a child, are eligible for this credit.

 

Child & dependent care credit

This credit is calculated as a percentage of the costs you pay for child and dependent care costs.

In 2020 and 2021, you can claim 20% to 35% of your care costs up to $3,000 if you pay for one person to receive care, or up to $6,000 if you have two or more people receiving care.

The percentage you can claim is based on your income. This credit has many rules on who qualifies as a dependent, the care they receive, so we recommend looking into this further to make sure you’re eligible to claim it.

 

Saver’s credit

Do you contribute to a traditional Roth IRA, 401(k), SIMPLE IRA, SARSEP, 403(b), 457(b), or an ABLE account? If so, you might be able to claim the Saver’s Credit up to $2,000.

You’re eligible for this credit if your AGI is less than $66,000 (married filing jointly), $49,500 (head of household), or $33,000 (other filing statuses) in 2021. The 2020 AGI thresholds were $65,000 (married filing jointly), $48,750 (head of household), and $23,500 (other filing statuses).

Here’s how it works. You can claim 50%, 20%, or 10% of the amount you contribute. The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly).

 

American Opportunity Tax Credit

You can take the American Opportunity Tax Credit for tuition, required fees, and course materials you pay in the first four years of higher education. You can claim up to $2,000, then 25% of the next $2,000 you pay in both 2020 and 2021.

Therefore, the maximum amount you can claim is $2,500 per eligible student. Income limits do apply to this credit.

 

Lifetime Learning Credit

You can claim the lifetime learning credit for qualified tuition and related expenses you pay for students enrolled in an educational institution. It can apply to undergraduate, graduate, and professional degree courses, which makes it more flexible than the AOTC.

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.

The maximum amount you can claim is $2,000 – 20% of the first $10,000 you pay for education expenses. If you pay less than $10,000, you claim 20% of that amount. Income limits also apply to this credit.

 

It’s key to plan ahead to influence your tax bill. Which of these credits or deductions could you qualify for? Should you do anything differently compared to previous tax years to try and reduce your tax bill? Save more for retirement? Pay more or less in child care? Pay off more student loan debt? Or, if you change your filing status, how does it impact everything else?

Knowing which credits or deductions apply to you is great. But, what more can you do to increase their impact so you have a lower tax bill when you file your annual return?

Originally published 3/14/2019. Updated 5/17/2021.

 

Have questions about 2020 tax rates, credits, or deductions? Let’s talk!