TAX INFLATION ADJUSTMENTS
The Internal Revenue Service today announced the tax year 2021 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes.
The Consolidated Appropriation Act for 2020 increased the amount of the minimum addition tax for failure to file a tax return within 60 days of the due date. The new additional tax is $435 or 100 percent of the amount of tax due, whichever is less, an increase from $330. The $435 additional tax will be adjusted for inflation.
The tax year 2021 adjustments described below generally apply to tax returns filed in 2022.
The tax items for tax year 2021 of greatest interest to most taxpayers include the following dollar amounts:
- The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
- The personal exemption for tax year 2021 remains at 0, as it was for 2020; this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
- Marginal Rates: For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:
- 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
- The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
- For 2021, as in 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
- The Alternative Minimum Tax exemption amount for tax year 2021 is $73,600 and begins to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200). The 2020 exemption amount was $72,900 and began to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption began to phase out at $1,036,800).
- The tax year 2021 maximum Earned Income Credit amount is $6,728 for qualifying taxpayers who have three or more qualifying children, up from a total of $6,660 for tax year 2020. The revenue procedure contains a table providing maximum Earned Income Credit amount for other categories, income thresholds and phase-outs.
- For tax year 2021, the monthly limitation for the qualified transportation fringe benefit remains $270, as is the monthly limitation for qualified parking.
- For the taxable years beginning in 2021, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements remains $2,750. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $550, an increase of $50 from taxable years beginning in 2020.
- For tax year 2021, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,400, up $50 from tax year 2020; but not more than $3,600, an increase of $50 from tax year 2020. For self-only coverage, the maximum out-of-pocket expense amount is $4,800, up $50 from 2020. For tax year 2021, participants with family coverage, the floor for the annual deductible is $4,800, up from $4,750 in 2020; however, the deductible cannot be more than $7,150, up $50 from the limit for tax year 2020. For family coverage, the out-of-pocket expense limit is $8,750 for tax year 2021, an increase of $100 from tax year 2020.
- 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.
- For tax year 2021, the foreign earned income exclusion is $108,700 up from $107,600 for tax year 2020.
- Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000, up from a total of $11,580,000 for estates of decedents who died in 2020.
- The annual exclusion for gifts is $15,000 for calendar year 2021, as it was for calendar year 2020.
- The maximum credit allowed for adoptions for tax year 2021 is the amount of qualified adoption expenses up to $14,440, up from $14,300 for 2020.
The tax law changed and you may not be aware of all the tax breaks you are eligible to receive. Some standard deductions continue to climb in 2021 by $150 to $12,550 for single taxpayers and married individuals filing separately, up $300; $18,800 for heads of households, up $150; and $25,100 for married couples filing jointly and surviving spouses, up $300 from the prior year.
While the large increase in the standard tax deduction will allow for many Americans to forgo the task of itemizing their deductions, there are still some ‘above-the-line’ deductions you may want to claim. Most of these have no income limits so everyone is able to claim them.
- School Teachers Expenses: For 2021, qualifying teachers can claim $250 for expenses paid or incurred for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used in the classroom.
- Student Loan Interest: For 2021, the $2,500 deduction for interest paid on student loans begins to phase out when modified adjusted gross income (MAGI) hits $70,000 ($140,000 for taxpayers filing a joint return) and is completely phased out when MAGI hit $85,000 ($170,000 for taxpayers filing a joint return).
- Job Expenses: Miscellaneous deductions, including unreimbursed employee expenses and tax preparation expenses, which exceed 2% of your AGI have been eliminated. That includes the home office deduction.
- Medical Savings Account (MSA): For 2021, a high-deductible health plan (HDHP) is one that, for participants who have self-only coverage in an MSA, has an annual deductible that is not less than $2,400 but not more than $3,600; for self-only coverage, the maximum out-of-pocket expense amount is $4,800. For 2021, HDHP means, for participants with family coverage, an annual deductible that is not less than $4,800 but not more than $7,100; for family coverage, the maximum out-of-pocket expense limit is $8,750.
- Charitable Donations: The percentage limit for charitable cash donations to public charities will remain at 60% for 2021.
RETIREMENT PLAN LIMITS
Retirement plan contributions are tax deductible. By putting money aside in a tax advantaged retirement account, you are saving for your future and also reducing your taxable income. And remember, you have until April 15, 2021 to make your 2020 IRA plan contributions!
For Roth accounts, you can only contribute to them if you make less than a certain amount of money. This salary amount was increased for 2021. Note that your contributions may be phased out at certain income levels so it is best to speak with your financial or tax advisor about your specific situation.
CONTACT US with any retirement planning questions you have.
None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation. An individual retirement account (IRA) allows individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Traditional IRA. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status and other factors. Taxes must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59½, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. Contributions to a Roth IRA are not tax deductible and there is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions). 403(b) withdrawals are taxed as ordinary income in the year received. Tax penalties and penalties for early withdrawal may apply if funds are withdrawn prior to age 59 ½.