As we start the new year and close out 2020 (thankfully for many), it is important to start your 2021 tax planning. Here is a brief summary of some of the changes in 2021:
For 2021, tax rates remain the same (10%, 12%, 22% … 37%), but the brackets defining the rate a tax payer pays have changed. For example:
- SINGLE filers with taxable income between $9,951 and $40,525 will pay a 12% marginal tax rate.
- MARRIED FILING JOINTLY (MFJ) filers with taxable income between $81,051 and $172,250 will pay a 22% marginal tax rate.
- A complete listing of the brackets and associated marginal rates are listed on the IRS site – IRS 2021 Inflation Adjustments
The standard deductions, which increased significantly as part of the 2017 Tax Cuts and Jobs Act (TCJA), have slight increases in 2021 for inflation.
- MFJ filers standard deduction in 2021 will be $25,100, an increase of $300
- The standard deduction for SINGLE, and married individuals filing separately, filers in 2021 will be $12,550, an increase of $150
- HEAD OF HOUSEHOLD filers will have a standard deduction in 2021of $18,800, an increase of $150
Long term capital gains, which are taxed at either 0%, 15% or 20% based on a filers taxable income, will incur some changes to thresholds in 2021. For example:
- The maximum taxable income threshold to pay NO capital gains tax (0% rate) amount on adjusted net capital gains for married persons filing jointly will be $80,800 and $40,400 for single individual returns. Long term capital gains are realized on the sale of a qualifying investment that has been owned longer than 12 months.
Tax credits, which reduce tax owed directly on the ‘bottom line’ will also see some changes in 2021:
- The Earned Income Credit for low-income taxpayers and the taxable income levels for its thresholds and ceilings have been adjusted for inflation. The maximum credit for three or more children will be $6,728.
- The credit for qualified adoption expenses, as well as the special credit for the adoption of a child with special needs, will be increased to $14,440.
- The phase out for the Lifetime Learning Credit will begin with modified adjusted gross income (MAGI) between $59,000 and $69,000 for SINGLE filers and between $119,000 and $139,000 for MFJ filers.
There will also be changes to the phase outs on retirement contributions and some incentives for low-income taxpayers to make contributions to their 401(k), 403(b), SIMPLE, SEP, certain 457 plans and Traditional/Roth IRAs. Some examples include:
- Married taxpayers filing joint returns will be eligible to claim a credit for contributions of up to $4000 at a rate or 50% with adjusted gross income (AGI) up to $39,500; at a rate of 20% with AGI up to $43,000; and at a rate of 10% with AGI up to $66,000. Take advantage of these incentives!
Thresholds and ceilings for participants in Medical Savings Accounts (MSAs) will be increased in 2021:
- For family coverage, the deductible must be at least $4,800 to qualify but no more than $7,150, an increase of $50 for both amounts. The out-of-pocket expense maximum for family coverage will increase by $100 to $8,750 for 2021.
- For self-only coverage, the plan’s annual deductible must be between $2,400 and $3,600 with a maximum out-of-pocket expense of $4800, an increase of $50 for each amount.
It is also important to understand the impact the CARES act (Coronavirus Aid, Relief, and Economic Security), may have on your 2021 tax planning.
There are other changes in 2021 that are important to understand to PROTECT what you work so hard to SAVE & GROW.
At Monument Financial Group, we help you plan for your future with tax-free and tax-deferred strategies. Register for a free ‘Money 101’ webinar to learn more.