Wondering what the Internal Revenue Service’s tax brackets and tax allowances are for the 2021 tax year?
Every year, tax provisions are adjusted for inflation even when there has been no action through Congressional legislation to change tax law.
The IRS annually adjusts more than forty tax provisions for inflation that include income tax brackets and income phase-outs for a variety of tax credits and deductions.
The adjustments are done to prevent bracket creep. Bracket creep occurs when people get pushed into higher tax brackets or miss out on tax credits and deductions due to inflation rather than an increase in real income.
As of the publishing of this update, below is a rundown of what’s changed and what hasn’t for 2021 (we will publish updates if federal legislation is passed which impacts 2021 tax rates, brackets and allowances). There is also a handout available for download at the top of the page.
In 2021, the standard deduction is $25,100 for married couples filing joint returns. That’s a boost of $300 from the previous year.
For single taxpayers and married individuals filing separately, the standard deduction is $12,550, which is $150 higher than 2020.
For individuals filing as head of household, the standard deduction increases $150 to $18,800.
The tax rates haven’t changed, with the highest possible tax rate at 37%, but the income ranges of the seven brackets have been adjusted upwards for inflation.
What Americans pay in capital gains taxes varies by income, with higher-income Americans paying a higher capital gains rate. The capital gains tax rates aren’t changing for 2021, but the income brackets have been adjusted up for inflation.
Americans who sell investments at a profit and have held those investments for longer than one year will pay zero tax on those profits (realized gains) if their income is $80,000 or less for married couples, filing jointly and $40,400 or less for an individual.
Married Americans filing jointly can make up to $501,600 and pay a 15% capital gains tax rate as can married couples filing separately who make up to $250,800. Individual taxpayers can make up to $445,850 and pay up to a maximum of 15%.
Most taxpayers pay a maximum 15% rate, but a 20% tax rate applies to Americans whose taxable income exceeds the thresholds set for the 37% ordinary tax rate.
Additionally, married taxpayers with Modified Adjusted Gross Income (MAGI) over $250,000 are subject to the 3.8% Net Investment Income Tax (NIIT). Single taxpayers are subject to NIIT if their MAGI exceeds $200,000. These thresholds are unchanged from previous years. The NIIT is an additional surtax, on top of the regular capital gains tax rates, on the lesser of 1) net investment income (interest, dividends, capital gains, etc.) or 2) the amount that your MAGI exceeds the thresholds listed above.
The contribution limits for 401(k), 403(b), and 457 plans are unchanged at $19,500. Workers who are 50 years of age or older can kick in an additional $6,500.
Traditional and Roth IRA contribution limits remain at $6,000, with an additional $1,000 catch-up contribution limit for workers age 50 and older.
There are income limits to contributing to a Roth. The income phaseout on Roth contributions is:
Married filing jointly: $198,000 to $208,000
Single taxpayer: $125,000 to $140,000
Head of household: $125,000 to $140,000
There are no income limits to contributing to a Traditional IRA, but if your Modified Adjusted Gross Income (MAGI) exceeds certain limits and you or your spouse are covered by an employer retirement plan, the amount of your contribution that is tax deductible can be phased out:
Married filing jointly (you are covered by an employer retirement plan): $105,000 to $125,000
Married filing jointly (your spouse is covered by an employer retirement plan): $198,000 to $208,000
Single taxpayer (or Head of Household): $66,000 to $76,000
The deduction limit in 2021 for cash donations to charities remains at 100% of a taxpayers Adjusted Gross Income (AGI). Previously, the limit was set at 60% of AGI but the CARES Act passed in 2020 “suspended” this limit and the suspension has been carried over into 2021.
To claim charitable deductions, you must ordinarily itemize your deductions, as opposed to claiming the Standard Deduction.
However, as part of the CARES Act, Congress allowed Americans who didn’t itemize their deductions in 2020 to claim a maximum “above-the-line” deduction for charitable donations up to $300 ($600 for married couples). Congress has extended this provision and the maximum deduction amounts to 2021.