The IRS has announced its 2021 cost-of-living adjustments to tax amounts that might affect you. Many increased to account for inflation, but some remained at 2020 levels. As you implement 2020 year-end tax planning strategies, be sure to take these 2021 adjustments into account in your planning.
Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopted the C-CPI-U on a permanent basis.
Related Read: Unusual Year Steers Year-End Tax Strategies
Individual income taxes
Tax-bracket thresholds increase for each filing status but, because they are based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $75 to $150, depending on filing status, but the top of the 35% bracket increases by $3,125 to $6,250, again depending on filing status.
| Tax Rate | Single | Head of Household | Married Filing Jointly or Surviving Spouse |
Married Filing Separately |
|---|---|---|---|---|
| 10% | $0 – $9,950 | $0 – $14,200 | $0 – $19,900 | $0 – $9,950 |
| 12% | $9,951 – $40,525 | $14,201 – $54,200 | $19,901 – $81,050 | $9,951 – $40,525 |
| 22% | $40,526 – $86,375 | $54,201 – $86,350 | $81,051 – $172,750 | $40,526 – $86,375 |
| 24% | $86,376 – $164,925 | $86,351 – $164,900 | $172,751 – $329,850 | $86,376 – $164,925 |
| 32% | $164,926 – $209,425 | $164,901 – $209,400 | $329,851 – $418,850 | $164,926 – $209,425 |
| 35% | $209,426 – $523,600 | $209,401 – $523,600 | $418,851 – $628,300 | $209,426 – $314,150 |
| 37% | Over $523,600 | Over $523,600 | Over $628,300 | Over $314,150 |
The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2021, the standard deduction is $25,100 (married couples filing jointly), $18,800 (heads of households), and $12,550 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law.
Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But, it might not help taxpayers who typically itemize deductions.
Education and child-related breaks
The maximum benefits of various education and child-related breaks generally remain the same for 2021. Most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.
The MAGI phaseout ranges generally remain the same or increase modestly for 2021, depending on the break. For example:
The American Opportunity Credit
The phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2021: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.
The Lifetime Learning Credit
The phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2021. They are $119,000–$139,000 for joint filers and $59,000–$69,000 for other filers — up $1,000 for joint filers but the same as 2020 for others.
The Adoption Credit
The phaseout ranges for eligible taxpayers adopting a child will also increase for 2021 — by $2,140 to $216,660–$256,660 for joint, head-of-household and single filers. The maximum credit increases by $140, to $14,440 for 2021.
(Note: Married couples filing separately generally are not eligible for these credits.)
These are only some of the education and child-related breaks that may benefit you. Keep in mind that if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.
Gift and estate taxes
The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2021, the amount is $11.7 million (up from $11.58 million for 2020).
The annual gift tax exclusion remains at $15,000 for 2021. It is adjusted only in $1,000 increments, so it typically increases every few years (it increased to $15,000 in 2018).
Retirement plans
Not all of the retirement-plan-related limits increase for 2021. Thus, you may have limited opportunities to increase your retirement savings if you have already been contributing the maximum amount allowed. Please find the new limitations in IRS Announces 2021 Employee Benefit Plan and Transportation Limits.
Crunching the numbers
With the 2021 cost-of-living adjustment amounts inching slightly higher than 2020 amounts, it is important to understand how they might affect your tax and financial situation. ORBA is happy to help crunch the numbers and explain the best tax-saving strategies to implement based on the 2020 and 2021 numbers.
If you have questions please contact Rob Swenson at [email protected] or 312.670.7444.
