8 New Tax Laws For 2021 That You Need To Know

Tax time is stressful enough for small business owners. Add in new tax laws that pretty much require a translator to decipher, and it can make the start of the year even more chaotic. In this post, we’re going to break down these laws and how they may impact your 2021 tax return.

Tax year 2021 has seen a number of new changes, including deductions that could lower your tax liability and new tax brackets. We’re going to break down eight of these laws and changes, so you can feel confident when doing your taxes. Keep reading to learn more about the new tax laws and changes for 2021 taxes.

8 New Tax Laws & Changes For 2021 Taxes

Whether you’re a small business owner or just do a gig on the side, it’s important to keep up with the latest tax laws before you file your annual return. From changes to how unemployment benefits are taxed to money-saving deductions, here are eight new tax laws for 2021 taxes to keep on your radar.

Charitable Deductions

Previously, only taxpayers that claimed itemized deductions were eligible to deduct charitable contributions. But for tax year 2021, all taxpayers — including those that claimed the standard deduction — are able to deduct $300 per person for charitable contributions. For married filing jointly taxpayers, this means that you can potentially deduct $600 while claiming the standard deduction.

For many business owners, itemizing deductions may be more time-consuming but can add up to big savings. For tax year 2021, the CARES Act allows taxpayers to deduct up to 100% of their adjusted gross income (AGI) for charitable contributions, up from the standard 60% of AGI in years past.

Business Meals Deduction

Typically, taxpayers can deduct up to 50% of the cost of business-related meals. However, for 2021, businesses can deduct up to 100% for qualifying meals. In order to qualify, all business-related meals must meet the following requirements, per the IRS:

• The business owner (or an employee of the business) must be present when food and beverages are presented
• The expense is not lavish or extravagant under the circumstances

This deduction can be used for dine-in, takeout, and catered meals.

Tax Bracket Changes

For tax year 2021, the tax brackets were increased to account for inflation. These changes are minor, but taxpayers could potentially drop to a lower tax bracket, which in turn lowers tax liability.

Here are the 2020 and 2021 rates for single filers:

And here are the 2020 and 2021 rates for taxpayers that are married, filing jointly:

Increased Standard Deductions

For 2021, standard deductions increased by $150 to $300 from tax year 2020 rates. Standard deduction rates for tax year 2021 are:

• Single Or Married Filing Separately: $12,550
• Head Of Household: $18,800
• Married Filing Jointly: $25,100

Of course, if you’re a small business owner, you may benefit more from taking the time to itemize your deductions.

Medical Expense Deductions

If you accrued medical expenses throughout 2021, there is some good news. Medical expenses that exceed 7.5% of your AGI are tax-deductible. Previously, this percentage has been as high as 10%, so you may be able to write off more medical expenses for tax year 2021. To give an example of how this works, let’s say you have $10,000 in medical expenses. If your AGI is $100,000, this means that you can deduct unreimbursed medical expenses exceeding $7,500 — or in this example, $2,500.

One thing to note is that you will have to itemize deductions in order to take advantage of this deduction.

Student Loan Relief

In previous years, taxpayers that had their student loans canceled had to claim this amount as taxable income. However, part of President Joe Biden’s American Rescue Plan excludes canceled loans from taxable income. This tax break will continue through 2025, and many expect it to become a permanent change.

Additionally, if you’re employed and received student loan assistance from your employer, you can exclude up to $5,250 of those funds from your taxable income. And if you’re an employer? This makes you eligible for a payroll tax deduction. This change was implemented in 2020 and will continue through 2025.

Child Tax Credit Changes

For tax year 2021, the child tax credit has seen several changes. Here’s a breakdown of what changed:

• The CTC increased to $3,000 per eligible child ages 6 to 17 and $3,600 for each child aged 5 and under.
• The credit is fully refundable.
• Minimum income limits were eliminated.
• Eligibility limits increased.
• Up to half of the credit was distributed as advanced payments each month from August 2021 to December 2021.

If you didn’t receive any advance CTC payments in 2021, don’t worry. You can claim eligible children on your tax return and receive the credit.

Unemployment Tax Relief Ends

While most tax changes for 2021 are positive, there is a tax change that could negatively impact your tax liability if you claimed unemployment. Under the American Rescue Plan, a large portion of unemployment benefits (up to $10,200 for single filers) was untaxed income. However, this tax break ended and is not available for 2021 taxes. In short, any unemployment benefits received in 2021 are subject to taxation.

The Bottom Line On New Tax Laws

New tax laws can be confusing, but hopefully, this post helped you decode some of the changes to expect when filing your tax return in 2022. By taking advantage of credits and deductions, you can lower your tax liability, leaving more money in your pocket. And don’t forget to take note of the changes for student loan forgiveness and unemployment if these apply to your personal situation.

First-time filer? Learn how to file your small business taxes in just six easy steps. You can also check out The Ultimate Small Business Tax Checklist to make sure you don’t overlook a single thing this tax season. Once you’re ready to file, don’t forget to pick reputable tax software to help along the way. Start your search by checking out our top picks for the best tax software for small businesses. Finally, don’t forget that you can always reach out to an accountant or tax professional to help you navigate the waters. Good luck!

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