The IRS announced new, inflation-adjusted tax brackets for 2021 in Revenue Procedure 2020-45 on Monday, October 26. These are the brackets that will be applied against your taxable income for 2021 returns filed in 2022 and will be in effect regardless of the upcoming November election unless Congress votes for change.
It is important to note the tax rates themselves have not changed since the Tax Cuts and Jobs Act (TCJA) went into effect in 2018. Rather, it is the range of taxable income that each rate is applied to that has been adjusted. It is also important to remember that the tax is progressive, meaning even if you fall into the higher tax brackets, your entire income is not taxed at the higher rate, just the portion of the income above the previous rate bracket.
For the tax year 2021, the top marginal tax rate will remain at 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly (MFJ)). The other rates are:
- 35%, for incomes over $209,425 ($418,850 for MFJ)
- 32% for incomes over $164,925 ($329,850 for MFJ)
- 24% for incomes over $86,375 ($172,750 for MFJ)
- 22% for incomes over $40,525 ($81,050 for MFJ)
- 12% for incomes over $9,950 ($19,900 for MFJ)
- 10% for incomes up to $9,950 ($19,900 for MFJ)
In addition, the standard deduction is increased $150 to $12,550 for individuals and $300 for married couples filing jointly. Heads of household saw the same increase to $18,800. The personal exemption – a provision of the TCJA – will remain at zero for 2021, and there will be no limitation on itemized deductions (another TCJA change). Also remaining unchanged is the annual gift exclusion amount of $15,000, though the lifetime gift tax exemption amount increased $120,000 to $11,700,000 ($23,400,000 for MFJ). The annual gift tax exclusion for a noncitizen spouse increased from $157,000 to $159,000.
In addition, the top (37%) income tax bracket for estates and trusts will begin at $13,051, up from $12,950. The alternative minimum tax exemption for estates and trusts, adjusted for inflation, will be $25,700, up from $25,400, and the phaseout of the exemption will start at $85,650, up from $84,800.
Other highlights of the Revenue Procedure include the qualified business income threshold under Internal Revenue Code Section 199A which will increase to $329,800 for married individuals filing joint returns and to $164,925 for married individuals filing separate returns, and to $164,900 for single individuals and heads of household. The foreign earned income exclusion amount is $108,700.
Under the TCJA, children under age 19 and college students under age 24 must pay taxes on unearned income (kiddie tax). For 2021, the standard deduction for unearned income subject to the kiddie tax is $1,100.
On the retirement front, there is no change for the basic salary deferral amount of $19,500 for 401k and similar plans. Catch-up limits for those 50 and older remains at $6,500. There was also no change for IRA contributions. In 2021, the contribution limit remains at $6,000 and the catch-up limit for those 50 or older remains at $1,000. The IRS has increased the 2021 income ranges that determine whether you can make deductible contributions to a traditional IRA, contribute to a Roth IRA at all, or claim the Saver’s Credit. If during the year a taxpayer or their spouse was covered by a retirement plan at work, the deduction can be reduced or eliminated based on filing status and income (if neither is covered by a plan at work this does not apply). The phase out ranges are as follows:
- Single taxpayers with a workplace retirement plan contributing to a traditional IRA phase out from $65,000 to $75,000.
- This range is $105,000 to $124,000 for MFJ where the spouse making the contribution has a workplace retirement plan. If the contributor is not covered but their spouse is covered by a workplace plan, the phaseout is between $198,000 and $208,000.
- The income limit for the Saver’s Credit for low and moderate-income workers is $33,000 for singles and married individuals filing separately, $66,000 for MFJ, and $49,500 for heads of household
- 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, and $198,000 to $208,000 for MFJ
There is no annual inflation adjustment in married filing separately situations. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is $0 to $10,000. The same range applies to traditional IRA contributions for married individual filing a separate return who are covered by a workplace retirement plan.
For the full detailed schedules by filing status and all other changes you can read the full Revenue Procedure at https://www.irs.gov/pub/irs-drop/rp-20-45.pdf.