“As we edge closer to the end of the year, it’s a great time to reassess your tax planning for 2021. An important part of this process is to know the likely tax bracket you’ll be in, the limits that could impact you, and the potential deductions available,” says Hayden Adams, CPA, CFP®, and director of tax planning at the Schwab Center for Financial Research. Here are eight things to keep in mind as you prepare to file your 2021 taxes.
1. Income tax brackets shifted a bit
There are still seven tax rates, but the income ranges (tax brackets) for each rate have shifted slightly to account for inflation. For 2021, the following rates and income ranges apply:
Taxable income brackets:
Taxable income brackets:
Married couples filing jointly (and qualifying widows or widowers)
|10%||$0 to $9,950||$0 to $19,900|
|12%||$9,951 to $40,525||$19,901 to $81,050|
|22%||$40,526 to $86,375||$81,051 to $172,750|
|24%||$86,376 to $164,925||$172,751 to $329,850|
|32%||$164,926 to $209,425||$329,851 to $418,850|
|35%||$209,426 to $523,600||$418,851 to $628,300|
|37%||$523,601 or more||$628,301 or more|
Source: Internal Revenue Service
2. The standard deduction increased slightly
One of the biggest changes to come out of the Tax Cuts and Jobs Act (TCJA) of 2017 was the doubling of the standard deduction. After an inflation adjustment, the 2021 standard deduction increases slightly, making the standard deduction $12,550 for single filers and married couples filing separately and $18,800 for single heads of household, who are generally unmarried with one or more dependents. For married couples filing jointly, the standard deduction rises to $25,100.
3. Itemized deductions remain the same
The TCJA eliminated many itemized deductions—including deductions for tax preparation fees, investment advisor fees, and unreimbursed job expenses—in favor of the higher standard deduction. In addition, some remaining itemizations were limited.
The following rules haven’t changed much for 2021, but are still worth pointing out.
- State and local taxes: The deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
- Mortgage interest deduction: The mortgage interest deduction is limited to $750,000 of indebtedness. But people who had $1,000,000 of home mortgage debt before December 16, 2017, will still be able to deduct the interest on that loan.
- Medical expenses: Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted in 2021.
- Charitable donations: The Consolidated Appropriations Act extends the cash donation limit of 100% of AGI, which was enacted under the CARES Act, to 2021.
- Miscellaneous deductions: No miscellaneous itemized deductions are allowed.
4. IRA contribution limits remain the same, but 401(k) limits increased a bit
The traditional IRA and Roth contribution limits in 2021 remain the same as in 2020. Individuals can contribute up to $6,000 to an IRA, and those age 50 and older also qualify to make an additional $1,000 catch-up contribution. If you’re able to max your IRA, consider doing so—you may qualify to deduct some or all of your contribution.
The 2021 contribution limits for 401(k) accounts also stays at $19,500. If you’re age 50 or older you qualify to make an additional $6,500 catch-up contribution as well.
5. You can save a bit more in your health savings account (HSA)
For 2021, the max you can contribute into an HSA is $3,600 for an individual (up $50 from 2020) and $7,200 for a family (up $100). People age 55 and older can contribute an extra $1,000 catch-up contribution.
To be eligible for an HSA, you must be enrolled in a high-deductible health plan (which usually has lower premiums as well). Learn more about the benefits of an HSA.
6. You may qualify for the child tax credit
The TCJA increased the child tax credit up to $2,000 per dependent child age 16 and younger and made it available to people with household incomes below $200,000 for single filers or $400,000 for joint filers in 2020.
The American Rescue Plan Act (ARPA) goes a step further by temporarily modifying requirements and credit amounts for 2021. First, the ARPA raises the age limit for dependents from 16 to 17. In addition, the child tax credit increases from $2,000 to $3,000 for children age 6 through 17 and up to $3,600 for children under 6. However, there is an income limit for this increased credit: for individual taxpayers, the phaseout starts at $75,000 ($150,000 for married filing jointly). If your income exceeds these limits, the previous $2,000 per child tax credit remains.
The IRS began sending monthly advance Child Tax Credit payments to eligible families in July and will continue until December. If your dependent doesn’t qualify for the child tax credit, you may still qualify for up to $500 of tax credits under the “credit for other dependents” (see IRS Publication 972 for more details). Tax credits, which reduce the tax you owe dollar for dollar, are generally better than deductions, which reduce your taxable income.
7. The alternative minimum tax (AMT) exemption went up
The TCJA greatly reduced the number of taxpayers subject to the AMT, which now mostly affects households with incomes over $500,000, according to the Tax Policy Center. Still, the AMT has investment implications for some high earners.
For 2021, the AMT exemptions are $73,600 for single filers and $114,600 for married taxpayers filing jointly. The phase-out thresholds are $1,047,200 for married taxpayers filing a joint return and $523,600 for all other taxpayers.
8. The estate tax exemption is even higher
The estate and gift tax exemption, which is indexed to inflation, rises to $11.7 million for 2021. But the now-higher exemption is set to expire at the end of 2025, meaning it could be essentially cut in half at that time if Congress doesn’t act.
The annual gift exclusion, which allows you to give money to your loved ones each year without incurring any tax liability or using up any of your lifetime estate and gift tax exemption, stays at $15,000 per recipient.
Don’t get caught off guard
As you prepare to file your taxes for 2021, here are a few additional items to consider.
- If you’re not retired, the 10% early withdrawal penalty that was waived for retirement account distributions in 2020 no longer applies for 2021.
- If you’re age 72 or older, make sure you’ve taken your required minimum distributions (RMD) from your retirement accounts or else you face a 50% penalty on any undistributed funds (unless it’s your first RMD, in which case, you can wait until April 1, 2022).
If you haven’t contributed to your retirement accounts already, now is the time. Review your earnings for the year and take advantage of any deductions that can lower your tax bill. Also, keep an eye on Washington for any last-minute tax changes that can affect your return before you file. Tax season will be here before you know it.