At CJ Smith CPA, we want to be forward thinkers and consider planning opportunities for 2021. This article shares IRS inflationary adjustments for 2021. Contact us to discuss your tax planning needs.
Standard Deductions – The standard deduction consists of a filing status-based basic amount and additional amounts for elderly and blind filers (and their spouses). The additional amounts do not apply to dependents. The 2020 and 2021 amounts are compared below.
Retirement Plans Contribution Limits remain unchanged @ $19,500 for 2021 for employees who participate in Sec. 401(k), Sec. 403(b), most Sec. 457 plans. The catch-up contribution limit for employees age 50 and over also remains unchanged at $6,500.
SIMPLE Retirement Accounts remain unchanged and is $13,500 for 2021.
IRA Contribution Limits – The annual limit remains unchanged at $6,000 for 2021 and the additional catch-up contribution limit for individuals age 50 and over is $1,000. This limit applies to the combination of traditional and Roth IRAs. However, there are additional limitations that apply to both traditional and Roth IRAs.
Traditional IRA – Typically contributions to a traditional IRA are tax deductible unless the taxpayer is also an active participant in an employer plan in which case the deductibility of the contribution is phased out for higher income taxpayers. The phaseout thresholds have increased somewhat for 2021.
Roth IRA Contributions – Roth IRA contributions are phased out for higher income taxpayers whether or not they actively participate in an employer’s plan. The AGI thresholds limiting Roth IRA contributions have been increased slightly for 2021.
Health Flexible Spending Accounts – limited to $2,750, unchanged from 2020. However, the funds must be used during the year or they are lost, except for a small carryover amount which has increased from $500 in 2020 to $550 in 2021.
Education Credits – Both the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are phased out for higher income taxpayers. However, only the phaseout for the LLC is inflation adjusted. For 2021 the LLC phaseout threshold for joint filers is $119,000, up from $118,000 for 2020. For other taxpayers the 2021 phaseout starts at $59,000, but a married individual filing a separate return can’t claim this credit.
Estate Tax Exclusion – The amount of the estate tax exclusion for a decedent passing away in 2021 has increased to $11.7 million, up from $11.58 million in 2020. This is an important planning area and we’ve devoted a separate post to this space alone
Annual Gift Exclusion – Coupled with estate planning, this is increasingly important to consider. This amount is unchanged, so the first $15,000 of gifts (other than gifts of future interests in property) to any person in 2021 is exempt from the gift tax. 2021 is the fourth consecutive year that this exclusion has been $15,000.
Sec 179 Expensing Deduction – Limited to taxable income from all of the taxpayer’s active trades or businesses, rather than depreciate, certain property. For 2021 the maximum is $1.05 million ($525,000 for married taxpayers filing separate) up from $1.04 million in 2020. The phaseout threshold based on the cost of Sec 179 property also increased, to $2.62 million, up from $2.59 million.
Adoption Credit – The maximum credit allowed for adoptions in 2021 is equal to qualified adoption expenses incurred up to $14,440, a $140 increase from $14,300 for 2020.
Tax Rate Schedules – Each year the tax rate schedules are also adjusted for inflation. The following are the schedules for 2021.
Auto Mileage Rates – Will not be released until later in the year or early in 2021.
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