The old saying that nothing is certain except death and
taxes is only partly true. Yes, you can certainly expect to pay taxes in 2021,
but you almost certainly won’t see the same kind of tax return thanks to a
number of tax law changes that are coming.
Many changes are triggered by inflation, which means the income
limits for claiming deductions are increasing.
1. Tax Brackets Increase for All Filing Statuses
Your federal taxes are calculated based on the tax brackets
for your filing status. Each year, these brackets are adjusted for inflation.
Here are the minimum income levels for the top tax brackets for each filing
status in 2021:
Single: $523,601 (up from $518,401 in 2020)
Head of Household: $523,601 (up from $518,401 in
2020)
Married Filing Jointly: $628,301 (up from $622,051 in
2020)
Married Filing Separately: $314,150 (up from $311,026
in 2020)
2. Employer-Sponsored Retirement Contribution Limits
Increase
The contribution limit for elective deferrals to 401(k),
403(b), most 457 plans and the federal government’s Thrift Savings Plan remains
at $19,500 for 2021, the same as in 2020. The total amount that can be
contributed to a plan by you and your employer combined rises to $58,000 from
$57,000 in 2020. However, the amount of the catch-up contribution for taxpayers
aged 50 and older remains at $6,500.
3. Traditional IRA Income Restrictions to Deduct
Contributions Rise
Contribution limits for IRAs remain unchanged at $6,000 if
you are under 50 years old and $7,000 if you are 50 or older. However, the IRS did
announce a few other tax changes that impact IRAs in 2021. First, if you are
covered by an employer-sponsored plan, your income limit when you’ll still get
a deduction for contributing increases.
Single Filers: The maximum deduction is reduced at
$65,000 in 2021 (up from $64,000 in 2020) and is completely eliminated at
$75,000 or more (up from $74,000).
Married Filing Jointly: The maximum deduction is
reduced at $104,000 (up from $103,000 in 2020) and is completely eliminated at
$124,000 (up from $123,000).
If your spouse is covered, but you aren’t, your maximum
deduction is reduced at $198,000 in 2021 (up from $196,000 in 2020) and is
completely eliminated at $208,000 (up from $206,000).
4. Income Limits to Contribute to a Roth IRA Rise
Roth IRAs offer after-tax savings for retirement, but if
your income is too high for the year, you’re not allowed to make a
contribution.
Single filers: For 2021, your maximum contribution is
reduced when your modified adjusted gross income is $125,000 (up from $124,000 in
2020) and eliminated at $140,000 (up from $139,000).
Joint filers: Your maximum contribution is reduced
when your modified adjusted gross income is $198,000 (up from $196,000) and
eliminated at $208,000 (up from $206,000).
5. Standard Deduction Rises for All Filing Statuses
All taxpayers are entitled to the standard deduction unless
they choose to itemize their deductions. The 2021 standard deductions for all
filing statuses are as follows:
Single: $12,550 (up from $12,400 in 2020)
Head of Household: $18,800 (up from $18,650)
Married Filing Jointly: $25,100 (up from $24,800)
Married Filing Separately: $12,550 (up from $12,400)
6. Still No Limitation on Itemized Deductions
Prior to 2018, if your adjusted gross income was too high,
the amount you could claim for certain itemized deductions was limited.
However, with the passage of the Tax Cuts and Jobs Act, the limitation on
itemized deductions was abolished for tax years 2018 through 2025.
This means that your itemized deductions for things like
charitable gifts, taxes paid, interest paid, job expenses and other
miscellaneous deductions continue to remain available, regardless of your
income level. Once this provision expires in 2025, the limitation on itemized
deductions based on income will be restored unless a new tax law is passed.
It is likely still more beneficial to take the standard
deduction, since that doubled with the passing of the TCJA.
7. Personal Exemptions Remain Unavailable
The value of a personal exemption was $4,150 back in 2018.
However, with the passage of the Tax Cuts and Jobs Act, the personal exemption
was eliminated. For 2021, personal exemptions remain at zero, just like in
2020.
Exemptions were formerly used as a way to reduce your
taxable income. When exemptions were in place, you could claim one per
dependent, including yourself, your spouse (if married and filing jointly) and
anyone who qualified as an additional dependent.
To compensate for the loss of personal exemptions, the
standard deduction was increased dramatically. Exemptions may return if tax
laws change again, but for 2021, you cannot claim a personal exemption.
8. HSA Contribution Limits Go Up
Health savings accounts let you save money in a special
tax-advantaged account for future medical expenses. In 2021, the amount you can
stash away increases to $3,600 for self-only coverage (up from $3,550 in 2020)
and $7,200 for taxpayers with family coverage (up from $7,150).
9. Estate Tax Exemption Limits Rise; Gift Tax Limits
Remain the Same
In 2021, the federal estate tax exemption rises to $11.7
million from $11.58 million in 2020. The gift tax annual exclusion — or the
amount you can give each person before you use up some of the estate tax
exemption (or owe gift taxes) — remains at $15,000, where it has been since
2018.
10. Transportation Fringe Benefit Limit Remains the Same
As a taxpayer, you’re typically required to include not only
any cash payments you receive from your employer but also any other benefits
your employer pays on your behalf when you report your taxable income to the
IRS. However, there are certain exceptions known as fringe benefits. For
example, in 2021, your employer can provide you with up to $270 of
transportation benefits each month, such as free parking or a public
transportation pass, without it increasing your taxable income.
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