Each year the IRS announces modifications to the tax code for the upcoming year. While there have been no significant changes, there were some notable adjustments.
Here are some of the important adjustments made for 2021:
- The Standard Deduction was increased to $25,100 for married couples who file jointly. Single filers and those who are married but file separately will have their standard deduction increased to $12,550. Head of households will also get an increase in their standard deduction to $18,800.
- The tax rates remained the same, but the brackets were increased slightly.
|2021 Tax Brackets|
|Rate||Married Joint Return||Single Individual||Head of Household||Married Separate Return|
|10%||$19,900 or less||$9950 or less||$14,200 or less||$9950 or less|
|12%||Over $ 19,900||Over $9,950||Over $14,200||Over $9,950|
|22%||Over $ 81,050||Over $ 40,525||Over $54,200||Over $40,525|
|24%||Over $172,750||Over $86,375||Over $86,350||Over $ 86,375|
|32%||Over $329,850||Over $164,925||Over $164,900||Over $164,925|
|35%||Over $418,850||Over $209,425||Over $209,400||Over $209,425|
|37%||Over $628,300||Over $523,600||Over $523,600||Over $314,150|
- Likewise, the capital gains rates remained the same, but the income bracket that determines the rate one pays increased. Single filers and married filing separately earning $40,400 per year or less will pay a 0% capital gains rate. Married filing jointly earning $80,800 or less and head of households earning $54,100 or less will also pay a 0% taxable gains rate. The 15% rate amount will apply to adjusted net capital gains up to $501,600 for joint returns; $250,800 for married individuals’ separate returns; $473,750 for head of household returns; and $445,850 for single individual returns. Any earnings above these amounts, the applicable capital gains rate is set at 20%.
- There were no changes to the maximum contribution amounts into employer provided retirement plans. The limit will remain at $19,500, with the catch-up contribution for employees age 50 and older will continue to be $6,500. For SIMPLE retirement accounts the contribution limit will remain $13,500 with a $3,000 catch up.
- The limit on annual contributions into an Individual Retirement Account (IRA), for both pretax or Roth or a combination, remains at $6,000 for 2021. The catch-up contribution limit remains at $1,000. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $66,000 and $76,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $105,000 to $125,000 for 2021. For an IRA contributor not covered by a workplace retirement plan and who is married to someone who is covered, the deduction is phased out if the couple’s income is between $198,000 and $208,000 in 2021.
- The Roth IRA AGI phase-out range increased to $198,000 to $208,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $125,000 to $140,000. If your income exceeds these amounts, you can open a nondeductible IRA and convert it to a Roth IRA.
- There were additional changes to the individual tax credit, Alternative Minimum Tax (AMT), and allowances for fringe benefits, MSAs, and estates.
It is also important to remember that the special tax provisions enacted as part of the CARES Act, which was passed to provide relief during the COVID-19 pandemic, expired at the end of 2021. These rules gave more flexibility regarding certain distributions and loans from retirement plans, and the waiver of required minimum distributions (RMDs).
Jeff Witz, CFP® welcomes readers’ questions. He can be reached at 800-883-8555 or at firstname.lastname@example.org.
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The information contained in this report is for informational purposes only. Any calculations have been made using techniques we consider reliable but are not guaranteed. Please contact your tax advisor to review this information and to consult with them regarding any questions you may have with respect to this communication.
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