As our country (and the world) deals with the COVID-19 pandemic, it’s time to start thinking about the 2021 tax filing season and the changes in legislation that will impact your filing in 2022.

 

1: Income Tax Brackets

Income tax brackets have been adjusted for inflation. The thresholds for these brackets are roughly 2% higher than in 2020.

2: Standard deduction

*Single filer and married couples filing separately:  $12,550 (Instead of $12,400)

*Head of household: $18,800 (instead of $18,650)

*Married couples filing jointly & surviving spouses: $25,100 (instead of $24,800)

3: Capital Gains

In 2021, the long-term capital gains tax rates (assets held for more than a year) are either 0%, 15%, or 20%. For assets held less than a year, short term capital gains are equal to your ordinary income tax rates of either 10%, 12%, 22%, 24%, 32%, 35%, or 37%.

Long-Term Capital Gains Tax Rate Single Filers (taxable income) Married Filing Jointly Heads of Household Married Filing Separately
0% $0-$40,400 $0-$80,800 $0-$54,100 $0-$40,400
15% $40,400-$445,850 $80,800-$501,600 $54,100-$473,750 $40,400-$250,800
20% Over $441,451 Over $496,601 Over $469,051 Over $250,801

 

 

 

4: Contribution Limits on Retirement Plans

For a traditional IRA, annual contributions of up to $6,000 or 100% of compensation (whichever is less) is allowed. Also allowed is additional catch up contributions of $1,000 if you are 50 years of age or older. Non employed spouses may also contribute up to $5,000 per year if conditions are met. ($6,500 if over 50).

For a SEP IRA, 25% of compensation is allowed up to $58,000, and approximately 20% for sole proprietors. In a simple IRA, employees can defer up to $13,500, and catch up contributions of $3,000 if you are over the age of 50. Employers must also match dollar for dollar up to 3% of compensation. However, this can be lowered to 1% for two of every five years, or 2% of compensation as a non-elective contribution.

5: Federal Estate/Gift Tax Exemption

In 2020, it rises to $11.7 million for individuals (up from $11.58 million). ‘Wealthy” married couples can now protect up to $23.4 million of their estate from federal death taxes (which can be as high as 40%). This is only allowed if the surviving spouse uses the late spouse’s unused portion of their estate/gift tax exemption.

6: Child Tax Credit

The maximum EITC (earned income tax credit) is $6,728 for taxpayers with three or more qualifying children, $5,980 for taxpayers with two or more children, $3,618 for taxpayers with one child, and $1,502 for taxpayers without any children. These amounts have increased slightly since 2020.

7: Affordable Care Act

The penalty for not having health insurance has been suspended for 2021 and possibly years to come. However, while the penalty is now $0, some states (like New Jersey) are considering bills to impose state fines on uninsured taxpayers. For California residents, the penalty for not having coverage the entire year will be $750 per adult and $375 per dependent child under 18 in the household when you file your 2021 state income tax return.

8: Foreign Earned Income Exclusion

If you earned income while working/living in another country in 2021, then you can claim the foreign earned income exclusion. You can shield as much as $108,700 of earned income for the year. Up from the $107,600 limit in 2020.

 

As you begin to digest these important tax law changes, you should consider consulting with your tax advisor and retirement advisor to take advantage of planning opportunities that could affect your overall retirement plan. It is more important now than ever to have your tax preparer collaborate with your retirement advisor to ensure you are taking full advantage of the new law. We will continue to dig into the new law to learn the impact on your personal and business taxes in the months to come.

This information is not intended to be a substitute for specific individualized tax advice.

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