On October 26, 2020, the Internal Revenue Service (IRS) announced the annual inflation adjustments for the 2021 tax year. The full list of adjustments is contained in Revenue Procedure 2020-45; however, the IRS has highlighted the adjustments, “of greatest interest to most taxpayers,” in a News Release published on its website. Here, Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, discusses some of the most notable changes for the upcoming year.
The 2021 Marginal Federal Income Tax Rates
Of importance to most U.S. taxpayers are the changes to the federal marginal income tax brackets for the 2021 tax year. As outlined by the IRS, the marginal tax brackets for 2021 are as follows:
- 37 percent for income over $523,600 ($628,300 for married couples filing jointly)
- 35 percent for income over $209,425 ($418,850 for married couples filing jointly)
- 32 percent for income over $164,925 ($329,850 for married couples filing jointly)
- 24 percent for income over $86,375 ($172,750 for married couples filing jointly)
- 22 percent for income over $40,525 ($81,050 for married couples filing jointly)
- 12 percent for income over $9,950 ($19,900 for married couples filing jointly)
- 10 percent for income of $9,950 or less ($19,900 for married couples filing jointly)
The 2021 Standard Deduction
For 2021, the standard deduction is increasing by $150 for individual filers and heads of households, and by $300 for married couples filing jointly. As a result, the 2021 standard deductions are as follows:
- Married Filing Jointly: $25,100
- Single or Married Filing Separately: $12,550
- Head of Household: $18,800
The 2021 Personal Exemption
For 2021, the personal exemption is remaining at $0. This is a result of the Tax Cuts and Jobs Act, which suspended the personal exemption through the start of 2026. The Tax Cuts and Jobs Act also eliminated the limitation on itemized deductions.
The 2021 Alternative Minimum Tax Exemption
For 2021, the Alternative Minimum Tax (AMT) exemption is increasing to $73,600 for individual filers, up from $72,900 in 2020. The AMT exemption will begin to phase out at $523,600 for individual filers, increasing from 2020’s phaseout threshold of $518,400. For married couples filing jointly, the 2021 AMT exemption is $114,600, and it begins to phase out at $1,047,200.
The 2021 Earned Income Credit
For 2021, the maximum Earned Income Credit (EIC) is increasing modestly from $6,660 to $6,728. The EIC is available to “qualifying taxpayers who have . . . qualifying children,” and is generally intended to benefit low and middle-income working taxpayers.
The 2021 IRA Contribution Eligibility Rules
Finally, the IRS has also adjusted the qualifying retirement contribution levels for 2021. These changes are outlined in Notice 2020-79. For single taxpayers and married taxpayers filing jointly who are covered by workplace retirement plans, the phase-out ranges for deducting eligible IRA contributions are increasing by $1,000. You can view the IRS’ summary of Notice 2020-79 here.
Contact Washington D.C. Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group
These are some (but nowhere near all) of the inflation adjustments that will go into effect for the 2021 tax year. If you have questions about federal income tax compliance, or if you need help dealing with the IRS, you can contact Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, at 202-349-4033, by email at firstname.lastname@example.org or by requesting a confidential consultation online.