IRS Releases Inflation Adjustments for 2021
Article Highlights: - Standard Deduction
- Transportation Fringe Benefits
- Retirement Plans Contribution Limits
- SIMPLE Retirement Accounts
- IRA Contribution Limits
- Health Flexible Spending Accounts
- Education Credits
- Estate Tax Exclusion
- Annual Gift Exclusion
- Sec 179 Expensing Deduction
- Foreign Earned Income Exclusion
- Alternative Minimum Tax
- Adoption Credit
- Tax Rate Schedules
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.
| Filing Status | 2020 | 2021 |
| Married Filing Joint & Surviving Spouse | $24,800 | $25,100 |
| Head of Household | $18,650 | $18,800 |
| Single & Married Filing Separate | $12,400 | $12,550 |
| Added Amounts for Elderly and Blind | 2020 | 2021 |
| Married Filing Joint & Surviving Spouse | $1,300 | $1,350 |
| Others | $1,650 | $1,700 |
Qualified Transportation Fringe Benefits - Qualified transportation fringe benefits for transit passes, commuter transportation and qualified parking provided by an employer are excluded from an employee’s income up to the amount of the inflation adjusted dollar limitation, which remains unchanged and will be $270 per month for 2021.
Retirement Plans Contribution Limits - The limit on contributions by employees who participate in Sec. 401(k), Sec. 403(b), most Sec. 457 plans, and the federal government’s Thrift Savings Plan remains unchanged and is $19,500 for 2021. The catch-up contribution limit for employees age 50 and over also remains unchanged at $6,500. SIMPLE Retirement Accounts - The contribution limit for SIMPLE retirement accounts remains unchanged and is $13,500 for 2021.
IRA Contribution Limits - For IRAs, the limit on annual contributions 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.
Filing Status 2020 2021 Single and Head of Householh $65,000 $66,000 Married Filing Joint and Surviving Spouse $104,000 $105,000 Married Filing Separate $0 $0
- 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.
Filing Status 2020 2021 Married Filing Joint $196,000 $198,000 Married Filing Separate (living with spouse) $0 $0 All Others $124,000 $125,000
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. Annual Gift Exclusion – 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 – The Internal Revenue Code allows a business taxpayer to expense, limited to taxable income from all of the taxpayer’s active trades or businesses, rather than depreciate, certain property used in business. 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.
Foreign Earned Income Exclusion – U.S. citizens or resident aliens who live and work abroad who meet certain qualifications may be able to exclude from U.S. income foreign earnings not to exceed an annual maximum amount. In addition, these taxpayers may be able to exclude or deduct certain foreign housing cost amounts. For 2021, the maximum foreign earned income exclusion is $108,700, up from $107,600 in 2020.
Alternative Minimum Tax (AMT) – The AMT is an alternate way of computing an individual’s income tax and applies if the AMT is greater than the regular tax.
Generally, the AMT comes into play when an individual has a large amount of specified tax preferences and deductions. There are sizable exemption amounts based on filing status, and they have increased for 2021.
| Filing Status | 2020 | 2021 |
| Married Filing Joint & Surviving Spouse | $113,400 | $114,600 |
| Single & Head of Household | $72,900 | $73,600 |
| Married Filing Separate | $56,700 | $57,300 |
These exemption amounts phase out for higher income taxpayers.The thresholds for the phaseouts are:
| Filing Status | 2020 | 2021 |
| Married Filing Joint & Surviving Spouse | $1,036,800 | $1,047,200 |
| Single, Head of Household and Married Separate | $518,400 | $523,600 |
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.
| Married Individuals Filing Joint Returns and Surviving Spouses | |
| If taxable income is: | If taxable income is: |
| Not over $19,900 | 10% of 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 | 67,260 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 | $168,993.50 plus 37% of the excess over $628,300 |
| Single Filers | |
| If taxable income is: | The Tax is: |
| Not over $9,950 | 10% of 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 |
| Head of Household | |
| If taxable income is: | The Tax is: |
| Not over $14,200 | 10% of 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 35% 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 |
| Married Taxpayers Filing Separate | |
| If taxable income is: | The Tax is: |
| Not over $9,950 | 10% of 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 |
Optional Auto Mileage Rates – The optional vehicle mileage rates for 2021 will not be released until later in the year or early in 2021.
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