The New IRS Tax Rates and Deductions for 2021

The New IRS Tax Rates and Deductions for 2021

April 06, 2021
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Amidst all the pandemic news and 2020 election drama, many might have missed that the IRS also quietly published new 2021 tax rates in late October and a there are plenty of changes that will impact taxpayers in 2021.

While it’s more than a year away (these changes are for 2021 returns filed by taxpayers in 2022), there are a few changes that you should know about.

Rules Not Yet Extended

It is very important that taxpayers realize that the 2020 rules enacted during the pandemic – namely the rules surrounding borrowing, distributions and the waiver of Required Minimum Distributions – will not be effective in 2021 unless Washington passes new legislation.

Standard Deductions

In very simple terms, the standard deduction is a specific dollar amount that reduces your taxable income. 

  • The standard deduction for 2021 will be $25,100, an increase of $300, for married couples filing joint returns;
  • The standard deduction for 2021 will be $12,550, an increase of $150, for single taxpayers’ individual returns and married individuals filing separately;
  • The standard deduction for 2021 will be $18,800, an increase of $150, for heads of households. 

2021 Tax Brackets

The tax rates and tax brackets for 2021, adjusted for inflation, are provided as follows:

Rate

Married Joint Return

Single Individual

Head of Household

Married Separate Return

10%

$19,900 or less

$9950 or less

$14,200 or less

$9950 or less 

12%

Over $19,900

Over $9,950

Over $14,200

Over $9,950

22%

Over $81,050

Over $40,525

Over $54,200

Over $40,525

24%

Over $172,750

Over $86,375

Over $86,350

Over $ 86,375

32%

Over $329,850

Over $164,925

Over $164,900

Over $164,925

35%

Over $418,850

Over $209,425

Over $209,400

Over $209,425

37%

Over $628,300

Over $523,600

Over $523,600

Over $314,150

Medical Savings Accounts

Certain thresholds and ceilings for participants in Medical Savings Accounts will also be increased:

  • For self-only coverage, the plan’s annual deductible for 2021 must be at least $2,400 and no more than $3,600 with a maximum out-of-pocket expense of $4800, an increase of $50 for each amount.
  • For family coverage, the deductible must be at least $4,800 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. 

Retirement Plan Contributions

The IRS also announced the 2021 limitations on retirement plan contributions and their phase-out ranges. The limitations for employee contributions to employer retirement plans will remain at $19,500, and the catch-up contributions for those 50 and older will remain at $6500.  For SIMPLE retirement accounts the limitation will remain $13,500.

Although the deductible amount for IRA contributions will remain at $6000 (with catch-up contributions for those 50 and older remaining at $1,000) the phase-out levels have adjusted upwards. And the phase-out levels depend on whether or not one is also an active participant in another employer retirement plan.

  • If an individual is an active participant in an employer retirement plan, the deduction phases out for adjusted gross incomes between $66,000 and $76,000 for single individuals and heads of households, and between $105,000 and $125,000 for married couples filing joint returns.
  • For an IRA contributor who is not an active participant in another plan but whose spouse is an active contributor, the phase out ranges from $198,000 to $208,000.
  • For a married active contributor filing a separate return, there is no adjustment and the phase-out range will remain $0 to $10,000.

These phase-outs do not apply if neither are covered by an employer-sponsored retirement plan.