I think I speak for everyone when I say good riddance to 2020. We hope for better days ahead. While 2020 presented significant challenges, we experienced limited changes to the key tax numbers and deductions for 2021.

The IRS implemented standard annual inflation adjustments to tax rate schedules, tax tables, and the cost of living, as expected. The good news is if you aren’t anticipating significant changes to your taxable income in 2021, as of now it’s looking likely that your tax return should remain relatively unchanged.

Here are key numbers you should know for taxes, deductions, and federal benefits.

Tax Brackets and Rates

There remain seven tax rates and tax brackets. Each bracket was adjusted higher to account for inflation.

The three long-term capital gains tax rates (0%, 15%, and 20%) remain unchanged. However, the income thresholds increased, allowing for additional recognized gains to be taxed in the lower two tiers.

The additional 3.8% surtax, knows as net investment income (NII), remains and applies as follows:

Single: Filing a return with a modified adjusted gross income over $200,000
Married: Filing a joint return with a modified adjusted gross income over $250,000

Standard Deduction

The standard deduction increased in 2021:

Single and married filing separately: From $12,400 to $12,550
Married filing jointly and surviving spouse: From $24,800 to $25,100
Head of household: From $18,650 to $18,800

For those 65 and over, the standard deduction increases by an additional $1,700 (single or head of household) and $1,350 per spouse (married).

The Tax Cut and Jobs Act (TCJA), which took effect in 2018, increased the standard deduction while putting a cap on certain itemized deductions. Because of this, the Urban-Brookings Tax Policy Center estimates that ~90% of households use the standard deduction.

Contribution Limits

The annual contribution limit for defined contribution retirement plans [401(k) and Thrift Savings Plan] remains at $19,500 with a $6,500 catch-up contribution (age 50 or older).

The annual contribution limit for traditional IRAs and Roth IRAs remains at $6,000 with a $1,000 catch-up (age 50 or older).

One slight change applies to the defined contribution maximum limit (all sources), which increased from $57,000 to $58,000 or $63,500 to $64,500 for those age 50 or older.

Social Security Benefits

Social Security benefits have a few changes for 2021:

Recipients received a 1.3% raise for 2021, compared with a 1.6% raise in 2020.
For recipients below their normal retirement age (NRA), the annual exempt amount (earnings test) is $18,960, up from $18,240 in 2020.
Maximum earnings subject to Social Security tax increased from $137,700 to $142,800.

Social Security taxes remain at 6.2% for employees and 12.4% for those who are self-employed.

Tax Credits and Deductions

There have been some changes and adjustments for 2021:

Child Tax Credit: This credit is available to taxpayers who have children under 17 at the end of the calendar year. The credit is $2,000 per qualifying child.
Other Dependents Credit: This is a $500 nonrefundable credit if you are financially taking care of someone over age 17.
Retirement Savings Credit (Saver’s Credit): If your AGI is below $66,000, you qualify for a tax credit between 10% and 50% of your qualified contributions, up to $2,000 per person, to a tax-qualified retirement plan. This can come in handy for semi-retirees earning a lower income while doing something they enjoy.
Qualified Business Income (QBI): This deduction allows eligible self-employed individuals and small business owners to deduct up to 20% of their income on their taxes. The 2021 limits increased to $164,900 (single filers) and $329,800 (joint filers).

Federal Government Benefits

Benefits for government employees and retirees saw minimal changes:

Federal Employees Health Benefits (FEHB): The average total premiums for current non-postal employees and retirees enrolled in FEHB plans will see an increase of 3.6%, which is lower than the 5% increase in 2020.

Given we are under a new administration, things are subject to change. If things do remain as is, most Americans will not experience a large shift in their income taxes for 2021.

Discuss your situation with a fee-only financial advisor.

Don’t take anything we say as tax or legal advice. We are not licensed as CPAs, tax preparers, or attorneys.

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