IRS Announces 2021 Tax Inflation and Cost-of-Living Adjustments
The IRS recently released Revenue Procedure 2020-45 announcing the tax year 2021 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules. It also released Notice 2020-79 announcing cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2021.
Tax Inflation Adjustments
The Consolidated Appropriation Act for 2020 increased the amount of the minimum addition tax for failure to file a tax return within 60 days of the due date. Beginning with returns due after Dec. 31, 2019, the new additional tax is $435 or 100 percent of the amount of tax due, whichever is less, an increase from $330. The $435 additional tax will be adjusted for inflation.
The tax year 2021 adjustments described below generally apply to tax returns filed in 2022.
The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
The personal exemption for tax year 2021 remains at 0, as it was for 2020; this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
For tax year 2021, the marginal rates are:
- 37 percent for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly)
- 35 percent for incomes over $209,425 ($418,850 for married couples filing jointly)
- 32 percent for incomes over $164,925 ($329,850 for married couples filing jointly)
- 24 percent for incomes over $86,375 ($172,750 for married couples filing jointly)
- 22 percent for incomes over $40,525 ($81,050 for married couples filing jointly)
- 12 percent for incomes over $9,950 ($19,900 for married couples filing jointly)
- 10 percent for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly)
For tax year 2021, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
For the taxable years beginning in 2021, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements remains $2,750. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $550, an increase of $50 from taxable years beginning in 2020.
For tax year 2021, for participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,400, up $50 from tax year 2020; but not more than $3,600, an increase of $50 from tax year 2020. For self-only coverage, the maximum out-of-pocket expense amount is $4,800, up $50 from 2020. For tax year 2021, for participants with family coverage, the floor for the annual deductible is $4,800, up from $4,750 in 2020; however, the deductible cannot be more than $7,150, up $50 from the limit for tax year 2020. For family coverage, the out-of-pocket expense limit is $8,750 for tax year 2021, an increase of $100 from tax year 2020.
For details on these and other inflation adjustments, including the Alternative Minimum Tax exemption, Earned Income Credit and the qualified transportation fringe benefit, visit IRS.gov.
Cost-of-Living Adjustments
The income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2021.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)
Here are the phase-out ranges for 2021:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $75,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $198,000 and $208,000, up from $196,000 and $206,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000. The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500.
- The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Key employee contribution limits remain unchanged for tax year 2021.
For more details on these and other cost-of-living adjustments, visit IRS.gov.