Are IRS Tax Inflation Adjustments for 2021 Scary?

As it does every year, the Internal Revenue Service announced the tax year 2021 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes.

Oct 27th 2020
Columnist
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The tax rates for individuals remain the same in 2021 as they were in 2020. The dollar figures for brackets are adjusted upwards slightly as shown below. 

2021 Tax Brackets for Single Filers and Married Couples Filing Jointly
Tax Rate Taxable Income[Single]

 

Taxable Income[Married Filing Jointly]
10% Up to $9,950 Up to $19,900
12% $9,951 to $40,525 $19,901 to $81,050
22% $40,526 to $86,375 $81,051 to $172,750
24% $86,376 to $164,925 $172,751 to $329,850
32% $164,926 to $209,425 $329,851 to $418,850
35% $209,426 to $523,600 $418,851 to $628,300
37% Over $523,600 Over $628,300

Source: Kiplinger

Following are some of the more significant changes that may affect your clients in 2021:

  • The standard deduction for single filers increases from $12,400 in 2020 to $12,550 in 2021, while the standard deduction for joint filers goes from $24,800 in 2020 to $25,100 in 2021.
  • The alternative minimum tax (AMT) exemption amount for 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 AMT 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).
  • For 2021, the monthly limit for the qualified transportation fringe benefit remains $270, as is the monthly limit for qualified parking.
  • For tax 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 tax years beginning in 2020.
  • The adjusted gross income (AGI) amount used by joint filers to determine the reduction in the Lifetime Learning Credit in 2021 is $119,000, up from $118,000 for 2020. Note that the phaseout thresholds for the American Opportunity Tax Credit are not indexed for inflation.
  • For 2021, the foreign earned income exclusion is $108,700, up from $107,600 in 2020.
  • The maximum Section 179 amount for in 2021 will be $1.05 million, up from $1.04 million, with a phaseout threshold of $2.62 million, up from $2.59 million.
  • An estate of a decedent who dies in 2021 can benefit from an exclusion amount of $11.7 million, up from $11.58 million in 2020.
  • The annual gift tax exclusion is $15,000 for 2021, the same as it was for 2020.
  • The maximum credit allowed for adoptions for 2021 is the amount of qualified adoption expenses up to $14,440, up from $14,300 for 2020.

Finally, note that contribution limits for 401(k) plans and IRAs remain the same in 2021 as they were in 2020. The annual limit for 401(k) deferrals remains at $19,500 ($26,000 if you’re age 50 or older), while the IRA contribution limit is $6,000 ($7,000 if age 50 or older).
 

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