As you are probably aware, the Internal Revenue announces cost-of-living-adjustments (COLA) each year that increase the amount of certain tax deductions, thresholds, exclusions exemptions, and change contribution limits for retirement planning. If you don’t pay attention to the adjustments, you may miss an opportunity to minimize taxes and maximize benefits. Let’s take a look at the adjusted numbers for 2021.
Standard Deduction for Income Tax
The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction that can be claimed on federal income tax. As a result, many people who had previously itemized deductions on their income tax returns elected to take the standard deduction instead.
For 2021, the standard deduction will be:
- $12,550 for taxpayers filing as single, or married taxpayers filing separately. This is an increase from $12,400 in 2020.
- $25,100 for married taxpayers filing jointly. This is an increase from $24,800 in 2020.
- $18,800 for taxpayers filing as head of household. This is an increase from $18,650 in 2020.
Blind or aged taxpayers can take an additional standard deduction amount. In 2021, the amount for individuals filing as head of household or single is $1,700, an increase from $1,650 in 2020. For married and all other filing statuses, the additional standard deduction is $1,350, up from the 2020 amount of $1,300.
Individual Retirement Accounts (IRAs)
If you contribute to a traditional IRA or Roth IRA, you will discover that the 2021 maximum contribution of $6,000 is the same as the 2020 contribution cap. Individuals aged 50 or older are still permitted to contribute an extra $1,000 in “catch-up” funds.
For Roth IRAs, the contribution limit begins to phase out at a certain level of modified adjusted gross income (MAGI). The phase-out MAGI ranges have inched upward in amount in 2021. Below the bottom of the range, you can make a full contribution to your Roth IRA; if your MAGI exceeds the top of the range, you may not contribute.
The 2021 MAGI “phase-out” ranges for various tax filing statuses are:
- Single/Head of household: $125,000-$140,000 (up from $124,000-$139,000 in 2020)
- Married, filing separately: $0-$10,000 (the same as 2020)
- Married, filing jointly: $198,000-$208,000 (up from $196,000-$206,000 in 2020)
Employees covered by a workplace retirement plan who also contribute to a traditional IRA should be aware that those contributions also begin to phase out at a certain level of MAGI:
- Single/Head of household: $66,000-$76,000 (up from $65,000-$75,000 in 2020)
- Married, filing jointly: $105,000-$125,000 (up from $104,000-$124,000 in 2020)
401(k)s, 403(b)s, and Other Employer Retirement Plans
Too many people fail to take advantage of retirement planning offered by their employers. If you are one of the wise people who do participate in these plans, you are probably aware of the annual limits on how much compensation you can defer. Unfortunately, these limits have not increased between 2020 and 2021.
Participants in 401(k), 403(b), and most 457 plans are allowed to defer a maximum of $19,500 in compensation this year, just like last year. Employees over the age of 50 are allowed to defer an additional $6,500 in income.
Employees who participate in a SIMPLE retirement plan can defer a maximum of $13,500, with an additional $3,000 available to defer for employees over 50.
Child’s Unearned Income: The “Kiddie Tax”
Unearned income of a child in excess of $2,200 is taxed at the income tax rate of the child’s parents. This number is also unchanged from 2020.
Estate, Gift, and Generation-Skipping Transfer (GST) Tax
The federal gift and estate tax basic lifetime exemption amount for 2021 is $11,700,000 (a taxable estate valued at less than this amount is excluded from federal estate tax). The same threshold applies to generation-skipping transfer tax exemption. The exclusion amount is increased from $11,580,000 in 2020.
There is no change in the annual gift tax exclusion/annual generation-skipping tax exclusion, which will remain at $15,000, as it was in 2020. The annual gift tax exclusion allows an individual to give up to $15,000 to as many people as they wish in a given year without those gifts being counted against the amount of the lifetime exemption.