The Internal Revenue Service has announced its annual inflation adjustments for the 2021 tax year. More than 60 tax provisions—including the tax rate schedules and other tax changes—are included in Revenue Procedure 2020-45.
While most of the adjustments generally apply to tax returns filed in 2022, there is a notable exception.
The Consolidated Appropriation Act for 2020 boosted the amount of the minimum additional 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% of the tax due, whichever is less. It’s an increase from $330. Going forward, the $435 will be adjusted for inflation.
What are the changes taking effect for TY2021?
The IRS has included the following items, saying they’re of the greatest interest to taxpayers:
- 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.
- Marginal Rates: For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:
- 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
- The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
- For 2021, as in 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
The Alternative Minimum Tax (AMT) exemption for tax year 2021 is $73,600 and begins to phase out at $523,600. For married couples filing jointly, the exemption is $114,600, with phase-out starting at $1,047,200.
In contrast, the AMT exemption for 2020 was $72,900 ($113,400 for MFJ) with phase-out starting at $518,400 for singles and $1,036,800 for those married filing jointly.
The maximum Earned Income Credit amount for tax year 2021 is $6,728 for qualifying taxpayers who have three or more qualifying children. That’s up from $6,660 for 2020. For a table showing the maximum EIC amount for other categories, income thresholds and phase-outs, see the revenue procedure.
Commuters will find the monthly limitation for the qualified transportation fringe benefit is unchanged from 2020: $270. The monthly limitation for qualified parking is unchanged as well.
Not much change on some health care items. 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.
Taxpayers who have self-only coverage in a Medical Savings Account in tax year 2021 must have a plan with an annual deductible that is not less than $2,400 but not more than $3,600. Both limits were raised $50 from 2020.
For self-only coverage, the maximum out-of-pocket expense amount is $4,800, up $50 from 2020.
For tax year 2021, 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 previous limit.
For family coverage, the out-of-pocket expense limit is $8,750 for tax year 2021, an increase of $100.
What are the other changes?
The adjusted gross income amount used by joint filers for tax year 2021 to determine the reduction in the Lifetime Learning Credit is $119,000, up $1,000 from the previous year.
The foreign earned income exclusion is $108,700 for tax year 2021, up from the previous $107,600.
Estates of taxpayers who die during 2021 have a basic exclusion amount of $11,700,000, up $120,000 from 2020.
The annual exclusion for gifts was kept unchanged from 2020 at $15,000.
The maximum credit allowed for adoptions was increased slightly from 2020; the amount of qualified adoption expenses was boosted to $14,440, up from $14,300.