Adjustments to federal tax brackets, deductions, credits, and more are not new—they happen every year. This year’s changes are small and are largely related to inflation, but regardless it’s important to be informed about them so you can make any necessary adjustments for next year’s taxes. Let’s take a look at the 2021 tax changes you can expect to see. (Note: these adjustments will affect your 2021 taxes that you file in April 2022)
When you file your taxes, you have a choice between itemizing your deductions and taking the standard deduction (the majority of people choose to take the standard deduction). Standard deduction amounts for 2021 are:
- $25,100 for married couples filing jointly
- $18,880 for heads of household
- $12,550 for single taxpayers and married people filing separately
In addition, there is an extra deduction of $1,350 for taxpayers who are blind or are over 65 years of age (unless the person is unmarried and not a surviving spouse, in which case it is $1,700). And for 2021 the standard deduction for children and others who can be claimed as a dependent on another taxpayer’s return is no more than the greater of $1,100 or $350 plus the person’s earned income (not to exceed the regular standard deduction).
Tax Rates and Brackets
Tax rates will remain the same this year, but tax brackets have shifted. The top tax rate of 37% applies to single taxpayers, married people filing separately, and heads of household (HOH) making over $523,600 and to married people filing jointly making over $628,300. Rates for all other taxpayers are as follows:
- 35% for incomes over $209,425 ($418,850 for married couples filing jointly, $209,401 for HOH);
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly, $164,901 for HOH);
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly, $86,351 for HOH);
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly, $54,201 for HOH);
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly, $14,201 for HOH).
- 10% for incomes of $9,950 or less ($19,900 for married couples filing jointly, $14,200 for HOH).
Capital gains tax refers to the tax on profits from the sale of non-inventory assets, such as stocks, bonds, real estate, property, and so on. Like other tax rates, capital gains tax depends on the taxpayer’s income and filing status, but capital gains rates are lower than regular income tax rates. The capital gains rates for 2021 will be:
- 0% for incomes up to $40,400 ($80,800 for married filing jointly, $54,100 for HOH)
- 15% for incomes up to $445,850 ($501,600 for married filing jointly, $473,750 for HOH)
- 20% for incomes above $445,850 ($501,600 for married filing jointly, $473,750 for HOH)
Note: all income amounts refer to taxable income.
Adjustments have been made to several individual tax credits for 2021. If any of the following apply to you, you’ll want to make note of these changes:
- Earned income credit (EIC)
The maximum credit for 3 or more children for 2021 will be $6,728. This credit begins to phase out at $25,470 (AGI, or earned income if higher), with no EIC for incomes of $57,414 or higher. Also, if a taxpayer’s investment income exceeds $3,650, they are not eligible for the EIC.
- Child Tax Credit
For 2021, the maximum refundable portion of the $2,000 child credit (for each child under 17) will be limited to $1,400 per child. Additionally, the credit for qualified adoption expenses will increase to $14,440.
- Lifetime learning credit
This maximum $2,000 credit will phase out between $59,000 and $69,000 modified AGI (between $119,000 and $139,000 for married filing jointly).
- Foreign earned income exclusion
This credit has been increased to $108,700 for the 2021 tax year.
Alternative Minimum Tax
The alternative minimum tax (AMT) applies to regular taxable income that has certain tax benefits added back in, in excess of a specified exemption level. For 2021, exemption levels for alternative minimum taxable income (AMTI) will be:
- $73,600 for single taxpayers, phasing out between $523,600 and $818,000
- $114,600 for married filing jointly, phasing out between $1,047,200 and $1,505,600
- $57,300 for married filing separately, phasing out between $523,600 and $752,800
The AMT rate is 26%, up to a maximum AMTI of $199,900 for single taxpayers and married filing jointly ($99,500 for married filing separately). All AMTI beyond these levels will be taxed at a rate of 28%.
Allowances: Fringe Benefits, MSAs
Allowances for many employee fringe benefits will remain at 2020 levels: qualified transportation and qualified parking benefits will stay at a monthly limit of $270; and the maximum salary reduction for health FSA contributions will hold steady at $2,750 for the year. One change for 2021 is that cafeteria plans that allow carryover of unused amounts will have the slightly higher maximum carryover amount of $550.
Thresholds and ceilings for medical savings accounts (MSAs) are going up as well:
- Self-only coverage: annual deductible of at least $2,400 and no more than $3,600; maximum out-of-pocket expenses at $4,800.
- Family coverage: annual deductible of at least $4,800 and no more than $7,150; maximum out-of-pocket expense at $8,750.
The gift and estate tax lifetime exclusion amount is key to determining how much wealth you can pass on to your family or another recipient without paying tax on it. This amount has risen to $11.7 million for 2021. The annual gift tax exclusion, which allows you to give up to a set amount to as many different recipients as you want, remains the same as in 2020 at $15,000.
Contribution limits to retirement plans have remained largely unchanged for 2021, but the phase-out income levels for IRA deductions have been adjusted. The new phase-out ranges for 2021 are:
- Roth IRAs: $125,000-$140,000 for single taxpayers; $198,000-$208,000 for married filing jointly; $0-$10,000 for married filing separately.
- Traditional IRAs for those with employer-sponsored accounts: $66,000-$76,000 for single taxpayers; $105,000-$125,000 for married filing jointly; $0-$10,000 for married filing separately.
- Traditional IRAs for those with a spouse who has an employer-sponsored account: $198,000-$208,000 for married filing jointly; $0-$10,000 for married filing separately.
As always, there are no such limits for 401(k) contributions.
2020 Cares Act Provisions Ending
Please note that the special rules for borrowing and taking distributions from retirement plans and any other special tax provisions that came into effect with the 2020 CARES Act will NOT be effective for 2021 (unless they are reenacted). So, at least for now, don’t plan on those provisions being available this year.
Wood CPA Can Help With 2021 Tax Changes and More
Taxes can be complicated, but Wood CPA is here to help! We provide tax planning and tax preparation services for federal and state taxes for individuals, corporations, partnerships, trusts, estates and nonprofits.
If you are in need of a tax accountant or have questions about any tax-related concern, contact us here or give us a call at 952-356-1110.