The Internal Revenue Service(IRS) issued its annual inflation adjustments at the end of October for tax year 2021, revising more than 60 tax provisions, including tax rate schedules, standard deduction amounts, and more.
- The standard deduction for married couples filing jointly for tax year 2021 is increasing to $25,100. For single taxpayers and married individuals who file separately, the standard deduction is increasing to $12,550, and for heads of households, the standard deduction will be $18,800.
- For tax year 2021, the top tax rate stays at 37 percent for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are 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). The lowest rate is 10 percent for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
- The personal exemption for tax year 2021 remains at 0, as it was for 2020. This elimination of the personal exemption was part of the Tax Cuts and Jobs Act.
- The Consolidated Appropriation Act for 2020 increased the amount of the minimum additional tax for failure to file a tax return within 60 days of the due date. Starting with tax returns due after Dec. 31, 2019, the new additional tax is $435, or 100 percent of the amount of tax due, whichever is less. The $435 additional tax will be adjusted for inflation.
Other provisions in Revenue Procedure 2020-45 include:
- For 2021, as in 2020, 2019 and 2018, there is no limitation on itemized deductions because that limitation was eliminated by the Tax Cuts and Jobs Act.
- The Alternative Minimum Tax exemption amount for tax year 2021 is $73,600 and starts to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200).
- The tax year 2021 maximum Earned Income Tax Credit amount is $6,728 for qualifying taxpayers who have three or more qualifying children. The revenue procedure includes a table providing maximum Earned Income Credit amount for other categories, income thresholds and phase-outs.
- For tax year 2021, the monthly limitation for the qualified transportation fringe benefit remains $270, as is the monthly limitation for qualified parking.
- 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.
- For tax year 2021, participants who have self-only coverage in a Medical Savings Account, the plan should have an annual deductible no less than $2,400 but no more than $3,600. For self-only coverage, the maximum out-of-pocket expense amount is $4,800. For tax year 2021, participants with family coverage, the floor for the annual deductible is $4,800, however, the deductible cannot be more than $7,150. For family coverage, the out-of-pocket expense limit is $8,750 for tax year 2021.
- For tax year 2021, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $119,000.
- For tax year 2021, the foreign earned income exclusion is $108,700.
- Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000.
- The annual exclusion for gifts is $15,000 for calendar year 2021.
- The maximum credit allowed for adoptions for tax year 2021 is the amount of qualified adoption expenses up to $14,440.
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