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Tax season 2021: new income tax rates, brackets, and the most important IRS forms

On October 26, 2020, the IRS announced its annual tax inflation adjustments for 2021 which addressed over 60 tax provisions, including tax rate schedules, and more. In this blog, we’re going to highlight the major tax changes that individuals and businesses must consider for this upcoming tax year of 2021. Also, we’re keeping you up to date on tax deadlines and extensions along with the required IRS forms to file.

Take note: due to the COVID19 pandemic, the IRS is taking longer to process paper tax returns and tax-related correspondence. Hence, electronic filing of your IRS forms is strongly recommended.

The most important changes to tax processes in 2021 include:

  1. An increase in standard deduction amounts
    – $12,550 for individuals and married couples filing separately;
    – $18,800 for heads of households;
    – $25,100 for married couples filing jointly and qualifying widow(er)s.
  2. The personal exemption amount for 2021 remains at a 0% rate.
  3. The seven tax rates effective in 2020 (10%, 12%, 22%, 24%, 32%, 35% and 37%) will remain unchanged, however, the tax brackets will increase. The highest tax rate of 37% stays the same for individual single taxpayers with an annual income of over $523,600 ($628,300 for married couples filing jointly).

For more information on other tax items, see the IRS Revenue Procedure 2020-45.

 

Tax rate schedules in 2020 vs 2021

Each year, the IRS aligns its tax brackets with inflation rates to reduce the so-called “bracket creep”. Otherwise, taxpayers will be pushed into higher tax brackets not because their income has increased, but because of rising inflation. In 2021, the tax rates will remain the same, but the tax brackets will increase. These tax brackets are marginal, meaning that different rates are paid on different amounts of taxable income and depend on the taxpayer’s filing status.

Overall, compared to 2020, the standard deduction for 2021 will increase by:

  • $300 for married couples filing joint returns and qualifying widow(er)s; 
  • $150 for single taxpayers’ individual returns, married taxpayers filing separately, and heads of households.

Listed below are the tax rate schedules for 2021 you’ll use to prepare the tax returns filed in 2022:

Tax rate schedules for 2021

Source: IRS

Listed below are the tax rates and brackets you’ll use to prepare your 2020 tax returns in 2021:

Tax rate schedules for 2020

 Source: IRS

 

2021 tax deadlines and dates

According to the IRS Tax Calendars for Use in 2021, the filing deadlines for fiscal-year taxpayers are as follows:

  • partnerships and S corporations must file their tax returns by March 15th, 2021;
  • individual and corporate tax returns must be filed by April 15, 2021.

It’s also possible to request a six-month extension for filing tax returns by submitting appropriate IRS tax extension forms.

Taxpayers have an option of e-filing their tax returns earlier. However, filing taxes until January 31, 2021, isn’t recommended. Before e-filing tax returns, taxpayers must ensure they have received all of the necessary forms and completed their income and deductions forms.

Below you will find a chart of tax deadlines for 2021:

  • Individual and sole proprietor income tax returns (IRS Form 1040/1040-ES): the filing deadline for 2020 individual tax returns is due on April 15, 2021. In 2020, for those individuals who make estimated tax payments (IRS Form 1040-ES) the deadlines were pushed due to the COVID19 pandemic. Hence, the final estimated payment for the 2020 tax year is due on January 15, 2021. 
  • Partnership income tax returns (IRS Form 1065): the filing deadline is due on March 15, 2021. To request an automatic six-month extension of time (until September 15, 2021), use Form 7004. 
  • C-corporation income tax returns (IRS Form 1120)
    • For C-corporations that operate on a calendar year, the filing deadline is due on April 15, 2021. A six-month extension of time (until October 15, 2021) can be requested using the IRS Form 7004.
    • For C-corporations that operate on a fiscal year, the tax returns deadline is the 15th day of the fourth month following the end of the corporation’s fiscal year. In this case, Form 7004 is used to request a seven-month extension. 
  • S-corporation income tax returns (IRS Form 1120-S)
    • For S-corporations operating on a calendar year, the filing deadline is due on March 15, 2021. The IRS Form 7004 can be used to request a six-month extension (until September 15, 2021). 
    • For S-corporations and partnerships operating on a fiscal year, the filing deadline is the 15th day of the fourth month following the end of the fiscal year. 

To learn more about 2021 filing dates for estates, trusts, gift tax returns, tax-exempt organizations, foreign partnerships, and nonresident aliens, visit the IRS website.

IRS Form 1040: a tax return filed by individuals and sole proprietors

The IRS Form 1040 is filled out by individuals and sole proprietors to file a federal income tax return with the IRS. It’s used to calculate the Adjusted Gross Income (AGI) and Taxable income after tax credits and deductions, as well as the amount of tax owed or the expected refund.

As for the New Form 1040 draft issued in 2019, the IRS kindly reminds that taxpayers should follow the changes in legislation before the final version of the form arrives. 

IRS Form 1040-ES: estimated tax payments

The IRS Form 1040-ES is meant for individuals and sole proprietors to calculate and pay estimated tax for 2020. The estimated tax method is used to pay tax on income that isn’t subject to withholding (such as self-employment earnings, interest, dividends, rents, alimony, etc.).

IRS Form 1065: how partnerships file their tax returns

The IRS Form 1065 must be filed by partnerships to report their income, gains, losses, deductions, credits, etc. A partnership’s income is not taxable, however, its net earnings are “passed through” to the partners. Hence, partners are obligated to report partnership items to the IRS on their tax or information returns.

IRS Form 1120 and Form 1120-S: how corporations file tax returns

A C-corporation (C corp) is a legal entity meant to protect its owners/shareholders from certain liabilities. Because of this, a C-corporation’s profit is subject to double taxation:

  1. As business income at the entity level – the C corp’s profits are taxed at federal corporate income tax rates starting at 15%;
  2. As personal income at the shareholder level (when the shareholders are paid a salary or acquire dividends) – the C corp’s profits are taxed at personal income tax rates. At that, no adjustments are made for the corporate taxes already paid.

S-corporations (S corps) do not pay federal corporate income taxes. Instead, every shareholder must report their profits or losses on their personal tax return annually. In many states, S-corporations pass the profits or losses through to the shareholders’ personal income tax returns. Because of this, S-corporations avoid double taxation on corporate income.

The IRS Form 1120 is used by domestic corporations to calculate their income tax liability and report their income, gains, losses, deductions, and credits to the IRS. All corporations (including those in bankruptcy) or entities classifying taxable as corporations must file this form even if they don’t have taxable income.

IRS Form 1120-S is used by S-corporation shareholders to report income, losses, and dividends to the IRS. Basically, the Form 1120-S defines the percentage of company shares that belong to each shareholder in a given tax season and must be filed by all individuals.

How to file for a tax extension

Taxpayers can request an automatic tax extension by submitting an appropriate form to the IRS:

  • Individuals and sole proprietors can file the IRS Form 4868 to apply for an automatic extension of time needed to file individual tax returns. The Form 4868 must be filed on or prior to April 15th, the regular tax return submission date. The form has two parts – Identification and Individual Income Tax, where taxpayers need to provide their personal information and estimate of their tax liability, respectively. 
  • Partnerships, corporations, s-corporations, and multiple-member LLCs can file the IRS Form 7004 to apply for an automatic extension of time to file business income tax, information, and other returns. There are several conditions for the extension to be granted:
    • proper completion of the IRS Form 7004;
    • proper tax estimate;
    • filing of the IRS Form 7004 before the due date of the return for which the extension is requested;
    • timely payment of any tax that is due.

The above forms give a six-month extension to file a tax return. Take note, an extension of time to file your income tax returns doesn’t give an extension of time to pay any taxes. Taxpayers must assess their tax liability on this form and pay any amount due.

IRS Form 990: annual return for tax-exempt organizations

The Internal Revenue Code identifies the entities exempt from income tax such as public charities, private foundations (Section 501(c)), political organizations (Section 527), and charitable trusts (Section 4947(a)(1)).

These are predominantly non-profits that are still required to file the IRS Form 990 (or Form 990EZ, if they qualify) to disclose revenues, expenses, and changes to net assets to the public. For entities operating on a calendar year, the Form 990/990EZ is due on May 15the of the following year.

IRS Form 8868: how tax-exempt organizations file for an extension

The IRS Form 8868 is used by tax-exempt organizations to request an automatic 3-month extension to file tax returns or request any additional extensions. The IRS Form 8868 must be submitted by the due date of the return for which an extension is being requested.  If an additional extension is requested, the 8868 form has to be filed by the extended due date of the return. The form 8868 is due on May 15the of the following year.

Filing tax returns electronically with pdfFiller

Due to the COVID19 pandemic, the IRS endorses the use of electronic filing to support social distancing and facilitate the processing of tax returns, refunds, and payments.

A credible document management solution will help you save time and money, as well as protect your health. Feel free to fill out, e-sign, and submit your IRS forms on desktop and mobile using pdfFiller.

Take note: the processing of tax returns that need a review, whether submitted electronically or in hard copy, may take longer than usual.

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