The IRS and the Social Security Administration have released 2021 inflation-adjusted figures for more than 50 tax provisions. In addition to a 1.3% cost-of-living adjustment (COLA) for Social Security beneficiaries, details about adjustments to tax rate schedules, exemptions, and various thresholds for deductions and credits were announced. The tax year 2021 adjustments generally are used on tax returns filed in 2022.
Tax Rate Tables
The highest marginal tax rate for individuals of 37% applies in 2021 to taxable income over $628,300 for married couples filing jointly (up $6,250 from 2020) and $523,600 (up $5,200 from 2020) for single taxpayers. See the end of this article for all of the individual and the estate and trust income tax rate tables for 2021.
The thresholds related to the 3.8% Medicare tax on unearned income and the 0.9% Medicare tax on wages and self-employment income remain unchanged for 2021 because these amounts are now indexed for inflation. These thresholds are: $250,000 for married couples filing jointly and $200,000 for single filers. Estates and trusts enjoy a slight increase in the 3.8% Medicare tax threshold, however, because that threshold is equal to the dollar amount at which the highest income tax bracket begins.
Alternative Minimum Tax (AMT)
For 2021, the AMT exemption increases from $113,400 to $114,600 for married couples filing jointly and from $72,900 to $73,600 for single filers. The AMT exemption is reduced by 25% of the amount by which alternative minimum taxable income in 2021 exceeds $1,047,200 for married couples filing jointly ($523,600 for single taxpayers).
For 2021, the 28% AMT rate applies to excess alternative minimum taxable income above $199,900 for married couples filing jointly and for single filers ($99,950 for married taxpayers filing separately).
Itemized Deductions and Standard Deduction
The standard deduction for married couples filing a joint return is slightly higher for 2021. The new standard deduction is $25,100 (up $300). For single individuals and married couples filing separate returns, the standard deduction is $12,550 for 2021 (up $150). The 2021 standard deduction for heads of household increases to $18,800 (up $150).
Individuals with AGI in excess of certain thresholds no longer need to “hair cut” their total itemized deductions by the Pease limitation, which was removed under the tax reform law.
Child Tax Credit
The amount of the child tax credit that may be claimed for each qualifying child is $2,000. The child tax credit begins to phase out for married couples filing a joint return with modified adjusted gross income in excess of $400,000, or $200,000 for all other taxpayers. The child tax credit and the phase-out levels are not indexed for inflation. For lower-income taxpayers, a portion of the child tax credit for each qualifying child is refundable, and the refundable portion in 2021 is $1,400, which is the same as the 2020 level.
Estate and Gift Tax
For 2021, the lifetime exclusion from estate and gift tax has increased from $11,580,000 to $11,700,000. The annual gift tax exclusion in 2021 remains at $15,000. Gift splitting allows married couples to give up to $30,000 to a person without making a taxable gift. The exclusion for gifts to a spouse who is not a citizen of the United States increases $2,000 to $159,000 for 2021.
Education
The Hope Scholarship credit (American Opportunity Tax Credit) is equal to 100% of the amount of qualified tuition and related expenses not in excess of $2,000, plus 25% of those expenses that exceed $2,000 but do not exceed $4,000. Because the eligible expenses are not indexed for inflation, the maximum credit remains $2,500. This credit begins to phase out for single individuals whose modified adjusted gross income (MAGI) exceeds $80,000 and at $160,000 for married couples filing joint returns (these amounts also are not adjusted for inflation).
For tax years beginning in 2020, the Lifetime Learning Credit phases out for single individuals whose MAGI exceeds $59,000 and at $119,000 for married couples filing joint returns.
The $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for single individuals with MAGI in excess of $70,000 and for married couples filing joint returns with MAGI in excess of $140,000 in 2021. The deduction is completely phased out for taxpayers at 2021 MAGI of $85,000 for single individuals and $170,000 for married couples filing joint returns.
Kiddie Tax
The amount used to reduce the net earned income reported on a child’s return subject to the kiddie tax remains at $1,100 in 2021. The same $1,100 amount is used to determine if a parent may elect to include a child’s gross income in the parent’s income and to calculate the kiddie tax.
Foreign Earned Income
For individual taxpayers who work overseas, the amount of foreign earned income that may excluded from taxation increases from $107,600 to $108,700 in 2021.
COLA Limits for Qualified Plans
The cost of living adjustments (COLA) affect the maximum limits for a variety of contributions and distributions for 2021, including defined benefit accounts, 401(k)s, and other defined contribution plans, as well as limits on employee stock ownership plans (ESOPs) and benefits to highly-compensated employees.
Defined Contribution Plans
The limits on elective deferrals to 401(k), 403(b), certain 457 plans, and the federal government’s Thrift Savings Plan remains at $19,500 for 2021 (same as 2020). The limit on annual additions to defined contribution plans is increased in 2021 to $58,000 (up $1,000).
Defined Benefit Plans and ESOPs
The maximum amount a defined benefit plan may pay a participant each year remains unchanged in 2021 at $230,000 (same as 2020). The amount for determining the maximum ESOP account subject to a five-year distribution period is increased to $1,165,000 in 2021. The dollar amount used to determine the lengthening period of the five-year distribution is also unchanged at $230,000 for 2021.
Compensation Related Limits / Definitions
The annual compensation limit relating to the maximum compensation counted for an eligible employee in a qualifying plan is increased by $5,000 to $290,000 for 2021. The limitation used in the definition of a highly compensated employee is increased by $5,000 to $130,000. The dollar limitation concerning the definition of key employee in a top heavy plan remains at $185,000 for 2021. The compensation amount relevant to the definition of control employee for fringe benefit valuation purposes in 2021 remains at $115,000 for officers and increases to $235,000 for other employees.
Individual Retirement Accounts (IRAs)
Eligible taxpayers can contribute up to $6,000 to an IRA (excluding catch-up contributions discussed below), which is unchanged for 2021. For taxpayers who are active participants in an employer-sponsored retirement plan, the deduction for making contributions to a traditional IRA is phased out for single taxpayers who have MAGI in 2021 between $66,000 and $76,000, up $1,000 from the 2020 amounts. For married couples filing a joint return in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan the income phase-out range is $105,000 to $125,000 in 2021, also up $1,000 from 2020. For married couples filing a joint return, in which the spouse who makes the IRA contribution is not an active participant in an employer-sponsored retirement plan but the other spouse is a participant, the deduction is phased out if the couple’s 2021 income is between $198,000 and $208,000, up $2,000 from 2020 levels.
The MAGI phase-out range for taxpayers making contributions to a Roth IRA in 2021 is $198,000 to $208,000 for married couples filing jointly, up $2,000 from 2020. For single taxpayers, the income phase-out range in 2021 is $125,000 to $140,000, up $1,000 from 2020.
Catch-up Contributions
The elective deferral limit for a SIMPLE plan remains unchanged at $13,500 in 2021. The $3,000 catch-up amount for SIMPLE plans also remains unchanged for 2021.
Social Security Wage Base Increases for 2021
The maximum amount of earnings subject to Social Security increased from $137,700 to $142,800 (up $5,100) in 2021. The Social Security Administration also reported that Social Security and Supplemental Security Income benefits will increase by 1.3% for 2021.
We have summarized the most common inflation adjustments here. For more information:
2021 Tax Rate Tables
| Married Individuals Filing Joint Returns and Surviving Spouses |
| If Taxable Income Is: | The Tax Is: |
| Not over $19,900 | 10% of the taxable income |
| Over $19,900 but not over $81,050 | $1,990 plus 12% of the excess over $19,900 |
| Over $81,050 but not over $172,750 | $9,328 plus 22% of the excess over $81,050 |
| Over $172,750 but not over $329,850 | $29,502 plus 24% of the excess over $172,750 |
| Over $329,850 but not over $418,850 | $67,206 plus 32% of the excess over $329,850 |
| Over $418,850 but not over $628,300 | $95,686 plus 35% of the excess over $418,850 |
| Over $628,300 | $168,993 plus 37% of the excess over $628,300 |
| Unmarried Individuals (other than Surviving Spouses and Heads of Households) |
| If Taxable Income Is:: | The Tax Is: |
| Not over $9,950 | 10% of the taxable income |
| Over $9,950 but not over $40,525 | $995 plus 12% of the excess over $9,950 |
| Over $40,525 but not over $86,375 | $4,664 plus 22% of the excess over $40,525 |
| Over $86,375 but not over $164,925 | $14,751 plus 24% of the excess over $86,375 |
| Over $164,925 but not over $209,425 | $33,603 plus 32% of the excess over $164,925 |
| Over $209,425 but not over $523,600 | $47,843 plus 35% of the excess over $209,425 |
| Over $523,600 | $157,804.25 plus 37% of the excess over $523,600 |
| Married Individuals Filing Separate Returns |
| If Taxable Income Is: | The Tax Is: |
| Not over $9,950 | 10% of the taxable income |
| Over $9,950 but not over $40,525 | $995 plus 12% of the excess over $9,950 |
| Over $40,525 but not over $86,375 | $4,664 plus 22% of the excess over $40,525 |
| Over $86,375 but not over $164,925 | $14,751 plus 24% of the excess over $86,375 |
| Over $164,925 but not over $209,425 | $33,603 plus 32% of the excess over $164,925 |
| Over $209,425 but not over $314,150 | $47,843 plus 35% of the excess over $209,425 |
| Over $314,150 | $84,496.75 plus 37% of the excess over $314,150 |
| Heads of Households |
| If Taxable Income Is: | The Tax Is: |
| Not over $14,200 | 10% of the taxable income |
| Over $14,200 but not over $54,200 | $1,420 plus 12% of the excess over $14,200 |
| Over $54,200 but not over $86,350 | $6,220 plus 22% of the excess over $54,200 |
| Over $86,350 but not over $164,900 | $13,293 plus 24% of the excess over $86,350 |
| Over $164,900 but not over $209,400 | $32,145 plus 32% of the excess over $164,900 |
| Over $209,400 but not over $523,600 | $46,385 plus 35% of the excess over $209,400 |
| Over $523,600 | $156,355 plus 37% of the excess over $523,600 |
| Estates and Trusts |
| If Taxable Income Is: | The Tax Is: |
| Not over $2,650 | 10% of the taxable income |
| Over $2,650 but not over $9,550 | $265 plus 24% of the excess over $2,650 |
| Over $9,550 but not over $13,050 | $1,921 plus 35% of the excess over $9,550 |
| Over $13,050 | $3,149 plus 37% of the excess over $13,050 |
For more information about tax planning with 2021 rates, please contact us.
Published on November 03, 2020