IRS Releases Inflation Adjustments for 2021

To cope with inflation, the tax code requires the IRS to adjust the tax rates, standard deductions, and a variety of other tax related numbers each year. Due to the relatively low rate of inflation from 2020 to 2021 (at least according to the calculation method prescribed by law for this purpose), several categories had no change or only a slight change. The following is a summary of the most commonly encountered inflation adjustments for 2021.  

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. 

  • Married Filing Joint & Surviving Spouse: $25,100 in 2021 ($24,800 in 2020)
  • Head of Household: $18,800 in 2021 ($18,650 in 2020)
  • Single & Married Filing Separate: $12,550 in 2021 ($12,400 in 2020)

Added amounts for elderly and blind:

  • Married Filing Joint & Surviving Spouse: $1,350 in 2021 ($1,300 in 2020)
  • Others: $1,700 in 2021 ($1,650 in 2020)

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 at $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 at $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 that case, the deductibility of the contribution is phased out for higher income taxpayers. The phaseout thresholds have increased somewhat for 2021:

  • Single & Head of Household: $66,000 in 2021 ($65,000 in 2020)
  • Married Filing Joint & Surviving Spouse: $105,000 in 2021 ($104,000 in 2020)
  • Married Filing Separate: $0 in 2021 (unchanged from 2020)

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:

  • Married Filing Join: $198,000 in 2021 ($196,000 in 2020)
  • Married Filing Separate (living with spouse): $0 in 2021 (unchanged from 2020)
  • All Others: $125,000 in 2021 ($124,000 in 2020)

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

The annual gift exclusion amount is unchanged. 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.

Tax Rate Schedules

Each year inflation adjustments are also made to tax rate schedules. Click here to view the schedules for 2021.

Optional Auto Mileage Rates

The optional vehicle mileage rates for 2021 will not be released until later in the year or early in 2021. Please check back for an update.

If you have any questions about inflation adjustments for 2021, please contact Cray Kaiser today. We’re here to help!

Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.