19 January 2021

The Major Tax Changes for 2021 You Need To Know About

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The old saying that nothing is certain except death and taxes is only partly true. Yes, you can certainly expect to pay taxes in 2021, but you almost certainly won’t see the same kind of tax return thanks to a number of tax law changes that are coming.

Many changes are triggered by inflation, which means the income limits for claiming deductions are increasing.

1. Tax Brackets Increase for All Filing Statuses 

Your federal taxes are calculated based on the tax brackets for your filing status. Each year, these brackets are adjusted for inflation. Here are the minimum income levels for the top tax brackets for each filing status in 2021:

Single: $523,601 (up from $518,401 in 2020)

Head of Household: $523,601 (up from $518,401 in 2020)

Married Filing Jointly: $628,301 (up from $622,051 in 2020)

Married Filing Separately: $314,150 (up from $311,026 in 2020)

2. Employer-Sponsored Retirement Contribution Limits Increase 

The contribution limit for elective deferrals to 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains at $19,500 for 2021, the same as in 2020. The total amount that can be contributed to a plan by you and your employer combined rises to $58,000 from $57,000 in 2020. However, the amount of the catch-up contribution for taxpayers aged 50 and older remains at $6,500.

3. Traditional IRA Income Restrictions to Deduct Contributions Rise 

Contribution limits for IRAs remain unchanged at $6,000 if you are under 50 years old and $7,000 if you are 50 or older. However, the IRS did announce a few other tax changes that impact IRAs in 2021. First, if you are covered by an employer-sponsored plan, your income limit when you’ll still get a deduction for contributing increases.

Single Filers: The maximum deduction is reduced at $65,000 in 2021 (up from $64,000 in 2020) and is completely eliminated at $75,000 or more (up from $74,000).

Married Filing Jointly: The maximum deduction is reduced at $104,000 (up from $103,000 in 2020) and is completely eliminated at $124,000 (up from $123,000).

If your spouse is covered, but you aren’t, your maximum deduction is reduced at $198,000 in 2021 (up from $196,000 in 2020) and is completely eliminated at $208,000 (up from $206,000).

4. Income Limits to Contribute to a Roth IRA Rise 

Roth IRAs offer after-tax savings for retirement, but if your income is too high for the year, you’re not allowed to make a contribution.

 Single filers: For 2021, your maximum contribution is reduced when your modified adjusted gross income is $125,000 (up from $124,000 in 2020) and eliminated at $140,000 (up from $139,000). 

Joint filers: Your maximum contribution is reduced when your modified adjusted gross income is $198,000 (up from $196,000) and eliminated at $208,000 (up from $206,000).

5. Standard Deduction Rises for All Filing Statuses 

All taxpayers are entitled to the standard deduction unless they choose to itemize their deductions. The 2021 standard deductions for all filing statuses are as follows:

Single: $12,550 (up from $12,400 in 2020)

Head of Household: $18,800 (up from $18,650)

Married Filing Jointly: $25,100 (up from $24,800)

Married Filing Separately: $12,550 (up from $12,400)

6. Still No Limitation on Itemized Deductions 

Prior to 2018, if your adjusted gross income was too high, the amount you could claim for certain itemized deductions was limited. However, with the passage of the Tax Cuts and Jobs Act, the limitation on itemized deductions was abolished for tax years 2018 through 2025.

This means that your itemized deductions for things like charitable gifts, taxes paid, interest paid, job expenses and other miscellaneous deductions continue to remain available, regardless of your income level. Once this provision expires in 2025, the limitation on itemized deductions based on income will be restored unless a new tax law is passed.

It is likely still more beneficial to take the standard deduction, since that doubled with the passing of the TCJA.

7. Personal Exemptions Remain Unavailable 

The value of a personal exemption was $4,150 back in 2018. However, with the passage of the Tax Cuts and Jobs Act, the personal exemption was eliminated. For 2021, personal exemptions remain at zero, just like in 2020.

Exemptions were formerly used as a way to reduce your taxable income. When exemptions were in place, you could claim one per dependent, including yourself, your spouse (if married and filing jointly) and anyone who qualified as an additional dependent.

To compensate for the loss of personal exemptions, the standard deduction was increased dramatically. Exemptions may return if tax laws change again, but for 2021, you cannot claim a personal exemption.

8. HSA Contribution Limits Go Up 

Health savings accounts let you save money in a special tax-advantaged account for future medical expenses. In 2021, the amount you can stash away increases to $3,600 for self-only coverage (up from $3,550 in 2020) and $7,200 for taxpayers with family coverage (up from $7,150).

9. Estate Tax Exemption Limits Rise; Gift Tax Limits Remain the Same 

In 2021, the federal estate tax exemption rises to $11.7 million from $11.58 million in 2020. The gift tax annual exclusion — or the amount you can give each person before you use up some of the estate tax exemption (or owe gift taxes) — remains at $15,000, where it has been since 2018.

10. Transportation Fringe Benefit Limit Remains the Same 

As a taxpayer, you’re typically required to include not only any cash payments you receive from your employer but also any other benefits your employer pays on your behalf when you report your taxable income to the IRS. However, there are certain exceptions known as fringe benefits. For example, in 2021, your employer can provide you with up to $270 of transportation benefits each month, such as free parking or a public transportation pass, without it increasing your taxable income.

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