Top 10 Tax Return Changes for 2021
Filing your annual tax return on time is highly important, especially if you are an expatriate from the U.S. Doing so will keep you away from added interest and penalties, help you safeguard credit, and save you from losing future refunds. For these reasons, it’s crucial for every expat to learn about the adjustments in the rules and regulations that the Internal Revenue Service (IRS) makes every year.
Crucial Tax Return Adjustments for Expats in 2021
As we enter another year of grappling with the global pandemic situation, there come some significant tax law changes for 2021. We all know that year-end tax planning plays a vital role in helping us diminish the tax burden and end each year with more earnings. So it’s helpful to know the exciting benefits as well as the possible pitfalls that these recent adjustments may offer.
With the help of financial experts, we list the 10 biggest tax return changes for individual taxpayers to help you prepare for the update before filing for 2021:
1. Foreign-Earned Income Exclusions
Annually, there are changes in exclusion tax, which are determined by inflation. For the year, expats can exclude up to $108,700 of their foreign-earned income from U.S. tax. This amount is a little higher compared to the $107,600 exclusion cost from the tax year 2020.
2. Standard Deductions
The standard deduction amount is higher in 2021 too. The standard deduction for Married Filing Jointly has increased from $24,800 in the previous year to $25,100 for tax year 2021.
For single taxpayers, the amount has also increased to $12,550 for single taxpayers, while for “head of household,” the amount has gone up to $18,800. This is favorable for larger households since a lower tax rate will be applied when you file as the head of a household.
3. Stimulus Payments (Economic Recovery Rebate)
If you haven’t received the third stimulus payment, or perhaps you didn’t get it for your children, you can claim it as a refund on your 2021 tax return if you’re eligible.
If you’re missing money from the first two rounds of payments, that needs to be claimed on your 2020 federal tax return.
The third recovery rebate amount totals $1,400 per qualifying individual (adults and children) and the funds are automatically paid to your registered U.S. government bank account. If the IRS doesn’t have bank account details for you on file, you can expect a check in the post.
If you were qualified in 2020 for the first two payments, you’ll probably be eligible again in 2021, depending on your income level.
Whether you’re filing jointly with $100,000 of income or as an individual with $75,000, you may be entitled to receive the third stimulus payment of $1,400. The money should be paid directly to you from the U.S. government so you’ll only need to claim it through your 2021 tax return if you don’t automatically receive a bank deposit or check.
If you haven’t received the third stimulus payment by December 31, 2021, we recommend claiming it on your 2021 tax return.
Get a US bank account
If you don’t have a US bank account, many US citizens living abroad can open an online account with a company such as wise.com. This effectively operates just like a regular checking account based out of the United States. The Routing number and Account number can be provided to the IRS on your 2021 tax return and any refunds due to you, including stimulus payments, can be paid to that account.
It’s also much faster…
Not only will you get your money much faster if you provide US bank account details, it’s very easy to send the funds anywhere in the world once you receive them. Firms like Wise.com do charge a small transaction fee but it’s usually less that non-US banks charge to process a US check.
I got a check but I can’t bank it!
This is super frustrating, we get it. In this case, you can contact the IRS and ask for the checks to be cancelled and for your IRS account to be credited. The checks will automatically cancel after enough time has passed anyway.
Once you have an account credit, you can file your next tax return including your US bank account details and the funds should be paid to your bank account.
4. Charitable Contributions
In the previous years, taxpayers could normally reclaim up to $25,100 in charitable contributions if they paid more than the required annual amount. Although they wouldn’t benefit from charitable contributions, they could get some funds back depending on the amount they paid.
If you pay jointly for 2021, you can deduct up to $300 of cash donations per person. This means you can be reduced down to $600 on top of the $25,100. Keep in mind that in order to claim back on charitable donations, the organizations you choose must be located in the U.S., have been established in the U.S., or must have been considered as an official American charity by the IRS.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
5. Child Tax Credit Refund
Even big earners can claim the Child Tax Credit Refund. You can earn up to $200,000 as a single person or $400,000, if filing jointly, and still be entitled to the refund as long as you meet the other criteria.
For tax year 2021, there have been many changes made to the Child Tax Credit, but nothing has really changed for American expats living abroad.
For expats, the total credit is still US$2,000 and the refundable portion of that is still US$1,400 per qualifying child.
You can learn all about the Child Tax Credit Refund here.
If you and your children/dependents have spent at least 6 months of the year in the United States, you could be eligible for much more. The increased payment is between $3,000 and $3,600 depending on the child’s age.
6. Student Loan Relief
2021 is a great year for students who have applied for student loan relief after graduating in the U.S. Unlike in the previous year, when debt reliefs are taxed at the normal rate, student loan relief and any financial assistance will no longer be taxable.
This means you won’t also need to declare it on a tax return until 2021.
7. Unemployment Benefits
Unemployment compensation is state-provided insurance that pays money to individuals who have lost their job to help them meet certain eligibility requirements. In the previous year, the benefits claimed were not taxed. However, for 2021 and in the coming years, any unemployment benefits claimed will be taxable and must be declared when filing a tax return.
8. Retirement Contributions For You IRA.
In the year prior to your retirement, it’s always smart to have a clear plan on what you want to do before the tax year ends. The process is quite simple if you are employed within the U.S. You will just need to pay higher contributions by using your 401K.
However, things may be different if you are an expat working in a foreign country because there’s a high chance that you don’t have a 401K plan. In this case, you can consider applying for an Individual Retirement Account (IRA) if you don’t already have one. This is a savings account that will allow you to save and invest for the long term.
If you’re under 50 years old, you would be able to add up to $6,000 to an IRA, while if you’re over 50, you could add up to $10,000 before April 15, 2022. By the end of April, any amount in the IRA will be non-taxable, yet unusable until the following year.
9. Long-term Capital Gains Rates
For this year, the thresholds for paying tax on long-term capital gains rates have changed. Investments up to $40,000 will be subject to 0% tax, while 15% tax shall be paid if you invested up to $400,000. Anything above the latter will be subject to 20% tax. These figures show that you can still earn back from your investment without paying tax.
However, keep in mind that this system is applicable for long-term capital gains only.
Any investments or assets sold within a 12-month period will be considered short-term. In order to be eligible for the tax rates mentioned above, the holding period of your full investment should be more than a year.
10. Esteemed Gifts
When it comes to gift taxes, you are only allowed to gift up to $15,000 per year as a single entity or up to $30,000 if you are filing jointly through cash or non-cash transfer.
On a lifetime basis, your gift is non-taxable as long as it’s no more than $11.7 million, regardless of whether it’s given to an individual inside or outside America.
However, there are cases in esteemed gifts in which you will need to declare on a gift tax return and file at the same time as your standard tax return. These instances may be as follows:
You gifted more than $15,000 in a single year.
You received a gift that cost more than $100,000 from an unknown person in the U.S. who is not a U.S. citizen, someone from overseas, or a green cardholder.
You received in excess of $100,00 combined gifts throughout the tax year.
When Can I Start Filing Taxes for 2021?
The IRS will open its doors on January 24, 2022 and start processing 2021 tax returns.
The IRS expects most taxpayers will receive their refund within 21 days of when they file electronically if they choose direct deposit and provide US bank account details.
The IRS urges taxpayers and tax professionals to file electronically. To avoid delays in processing, people should avoid filing paper returns wherever possible.
By law, the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid-February, though eligible people may file their returns beginning on January 24. The law provides this additional time to help the IRS stop fraudulent refunds from being issued.
However, if you are filing tax returns on paper, it could take up to 6 months before the full refund is issued to you. For a hassle-free tax return filing, it’s best to start gathering all the necessary proof and details in December 2021. Once you have the important documents ready, you’ll be able to file as soon as the IRS starts accepting tax returns.
If you need help with filing your tax return, Expat Tax Online offers an easy-to-follow tax questionnaire that will let you jump to the front of the queue as soon as the IRS opens.
Get a quote from Expat Tax Online here