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The Numbers You Need: The 2021 IRS Limits

Fall brings color, decorative gourds, cozy knits and the numbers you need from the IRS to plan ahead for next year. Remember that the below applies to money you earn starting January 1, 2021, so don’t make any changes just yet. See this post for the numbers affecting 2020. Some important highlights:

Standard deduction

  • increases to $12,550 if your filing status is single or married-filing-separately

  • increases to $18,800 if your filing status is head of household

  • increases to $25,100 if your filing status is married-filing-jointly

Review this post for an explainer on the filing statuses and which to use.

Tax brackets

  • the number of brackets remains the same at 7

  • the limits of each bracket increases by about 1-2%: see here for specifics on the brackets

401k/403b/457/Thrift Savings Plan contribution limits

  • the employee contribution limits remain $19,500

  • the catchup contribution limit (which is available to you beginning the year you turn 50) remains $6,500

  • the overall plan limit (employee + employer + catchup) increases to $58,000. This is the number for those contributing to SEP or Solo 401k plans to keep in mind as well

IRA contribution limits

  • the IRA and Roth contribution limit remains $6,000, and the catchup contribution remains $1,000. However, the income limits that relate to making or deducting these contributions will change, so familiarize yourself with those limits, or ask your advisor, before making a contribution in 2021

Estate and gift tax exemption

  • the estate tax exemption increases to $11.7 million per individual - a married couple can leave an estate of $23.4 million free of federal estate taxes. States might have a different idea, of course.

  • the annual gift tax exclusion again remains $15,000. This means you can give $15,000 to as many people each year as you like without it having an impact on your taxes. If you are married, you and your spouse can each give $15,000. And remember, a gift is never taxable to the recipient.

Social Security

  • cost-of-living adjustment (COLA): 1.3%

  • the earnings limit increases to $142,800. This is the maximum amount of annual income that is subject to the Social Security tax. If you will earn more than this next year, remember to factor in the increased take-home once you reach that limit, and be proactive about giving those dollars a job. Also keep in mind that the limit is applied to each person individually: marital status, deductions, and/or your spouse’s income don’t matter.

What’s not changing

  • medical, state and local tax, and charitable contribution deductions remain the same (though for 2020, if you don’t itemize, you can also claim a charitable deduction of up to $200 for cash contributions; that goes away in 2021)

  • rules for the mortgage interest deduction stay the same - basically the interest on the first $750,000 of new debt ($375,000 for married filing separately taxpayers) you take on is deductible, anything above that is not. This rule is more complicated than it seems on the surface, so ask for guidance specific to your situation

You can use the above information, as well as any expected changes to your situation (expected job change? change in marital status?) to consider any moves you might want to make in January for the rest of the year.

I’ll also note that obviously, the election is top of mind for a lot of people, as well as trying to determine what changes might come to the tax code as a result of various outcomes. Remember that it takes a long time to change tax rules, even with the executive and legislative branch on the same side! It’s unlikely that anything will change quickly, and any policy shift by a new administration will almost certainly not take effect until the 2022 tax year.


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