As we head into a new year, the IRS has set 2021 inflation adjustments for over 60 tax provisions. Here’s a snapshot of the most important changes, including the tax rate and schedules, income limits for IRA contributions, and more.
Standard Deduction Amounts
The standard deduction amount for individuals and married individuals filing separately increases $150 to $12,550, up from $12,400. Married couples filing jointly see a $300 increase to $25,100, up from $24,800. And heads of households will be up $150 to $18,800 from $18,650.
There is no change in the personal exemption amount for 2021, remaining at 0, as it was for 2020. The Tax Cuts and Jobs Act eliminated the $4,050 per-household-member exemption, which is scheduled to expire on Jan. 1, 2026, unless Congress acts.
Tax Brackets
For tax year 2021, the tax brackets and their limits are as follows:
- 37% for incomes over $523,600 ($628,300 married filing jointly).
- 35% for incomes over $209,425 ($418,850 married filing jointly).
- 32% for incomes over $164,925 ($329,850 married filing jointly).
- 24% for incomes over $86,375 ($172,750 married filing jointly).
- 22% for incomes over $40,525 ($81,050 married filing jointly).
- 12% for incomes over $9,950 ($19,900 married filing jointly).
- 10% for incomes for incomes of $9,950 or less ($19,900 married filing jointly).
Social Security Wage Base
The Social Security Administration has increased the maximum amount of wages subject to the old age, survivors, and disability insurance (OASDI) tax to $142, 800 in 2021 from $137,700 in 2020, an increase of $5,100. If you have annual income at or above the maximum wage base, you’ll pay a 6.2% tax rate for a total of $8,853.60 in OASDI tax in 2021. If you’re self-employed, the tax rate is doubled at a rate of 12.4% for a total of $17,707.20 in OASDI tax for 2021.
Medicare tax rates remain unchanged in 2021 for both the employee and the employer at 1.45% of all taxable wages. Similarly, if you have annual income over $200,000, you are still subject to an additional 0.9% Medicare tax in 2021.
401(k) Contributions
The 2021 401(k) individual contribution limit is $19,500, unchanged from 2020. The rate for employers increased $1,000 to $38,500 in 2021 from $37,500 in 2020. So, if you were to max out your 401(k) contributions in 2021, you could end up putting way a total of $58,000 pretax in 2021.
In addition, if you are 50 years or older, there’s also a $6,500 “catch-up” contribution that can be added on top of both the individual and employer contribution amounts.
Earned Income Tax Credit
If you have three or more children, you can claim a maximum amount of $6,728 for the earned income tax credit, up from $6,600 in 2020. The adoption credit will also increase slightly to $14,440 in 2021 from $14,300 in 2020.
Alternative Minimum Tax (AMT)
The AMT tax runs parallel to the standard tax system, but it comes with a different rate structure (set at 26% or 28%) and also eliminates some common deductions, credits, and other standard breaks that could reduce taxable income.
In 2021, AMT rates are set to go up to $73,600 for individual filers ($72,900 in 2020) and $114, 600 for joint filers ($113, 400 in 2020). Exemption rates phase out at $523,600 for individual filers and $1,047,200 for joint filers.
Affordable Care Act (ACA) “Affordability” Percentage
The ACA “affordability” threshold goes up to 9.83% in 2021, up slightly from 9.73% in 2020. This means employers that are subject to the ACA cannot charge employees more than 9.83% of their household income for the least-expensive, self-only health plan. You may use the IRS’ safe harbor method(s) to determine an employee’s household income.
ACA Reporting
The deadline for employers to provide employees with ACA Form 1095-C or Form 1095-B has been extended from Jan. 31, 2021 to March 2, 2021. The IRS also implemented a good-faith effort relief plan for 2020 reporting where employers will not be penalized if the forms are incorrect or inaccurate. Both forms are still due on the same deadline—Feb. 28 for paper filings and March 31 for electronic filings.
Qualified Business Income Deduction
If you have pass-through income on a sole proprietorship, partnership, S corp, or LLC, you may be eligible to deduct up to 20% of qualified business income. In 2021, the threshold amount increases to $164,900 for individuals ($163,300 in 2020) and $329,800 for joint filers ($326,800 in 2020). If your business income exceeds that amount, the IRS provides a calculation to determine whether you can receive a full or partial business income deduction.
Getting Ready for 2021
Be sure that you’re prepared for the adjustment amounts in 2021 by taking a look at your financial situation and planning accordingly. We’re here to help if you would like to start on your financial plan for 2021. Contact me at stu@erocktax.com to get started!
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.