What You Need to Know About 2021 Personal Income Taxes

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What You Need to Know About 2021 Personal Income Taxes
AMT Exemptions for 2021 and 2022
2021 Exemption2021 Phaseout2022 Exemption2022 Phaseout
Single$73,600$523,600$75,900$539,900
Heads of Household$73,600$523,600$75,900$539,900
Married Filing Jointly$114,600$1,047,200$118,100$1,079,800

Individual income tax laws in five states—California, Colorado, Connecticut, Iowa, and Minnesota—include an alternative minimum tax (AMT).

Charitable Contributions

Even if you use the standard deduction in 2021, the CARES Act offers a $300 ($600 if married filing jointly) above-the-line deduction for monetary gifts to designated charities. Furthermore, the bill eliminates the 60% AGI cap on cash donations for people who itemize: In 2021, you may deduct contributions up to 100% of your AGI. Donations to donor-advised funds and supporting organizations are ineligible.

The cash contribution ceiling of 100% of AGI is not automatic. You must choose to accept the new restriction; otherwise, the previous (lower) limit will apply. Your choice may be made on Form 1040 or Form 1040-SR.

401(k) Plan Contribution Limits

Employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s thrift savings plan (TSP) have a contribution maximum of $19,500 for 2021. (unchanged from 2020).However, owing to higher-than-average inflation, the ceiling increases to $20,500 in 2022.

The catch-up contribution maximum for workers 50 and older remains at $6,500 in 2021 and 2022. The following plans are subject to the catch-up limit:

The contribution maximum for SIMPLE retirement accounts is $13,500 in 2021 (the same as in 2020), rising to $14,000 in 2022. Participants aged 50 and older have a $3,000 catch-up maximum for both years.

IRA Contribution Limits

For 2021 and 2022, the annual contribution limit for regular and Roth IRAs continues at $6,000 per year. For people above the age of 50, there is an extra $1,000 catch-up payment.

If certain circumstances are met, taxpayers may deduct contributions to a conventional IRA. If either the taxpayer or their spouse was covered by a retirement plan at work during the year, the deduction may be decreased or phased out. The phase-outs of the deduction do not apply if neither the taxpayer nor their spouse is covered by an employer-sponsored retirement plan.

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Phase-out ranges for 2021 (and 2022) are as follows:

  • The phase-out range for single taxpayers covered by a workplace retirement plan is $66,000 to $76,000 in 2021 ($68,000 to $78,000 in 2022).
  • When married filing jointly, the phase-out range is $105,000 to $125,000 in 2021 ($109,000 to $129,000 in 2022) when the spouse making the IRA contribution is covered by a company retirement plan.
  • The deduction is phased out for an IRA contributor who is not covered by an employment retirement plan and is married to someone who is if the couple’s income is between $198,000 and $208,000 in 2021 ($204,000 to $214,000 in 2022).
  • The phase-out range for a married person filing a separate return who is protected by an employment retirement plan does not change annually and stays $0 to $10,000 in both 2021 and 2022.

Contributions to a Roth IRA are not tax deductible. Furthermore, there are income limits on how much you may contribute to a Roth IRA. In 2021, the income phase-out range for taxpayers making Roth IRA contributions is $125,000 to $140,000 for singles and heads of household ($129,000 to $144,000 in 2022). The income phase-out range for married couples filing jointly in 2021 is $198,000 to $208,000 ($204,000 to $214,000 in 2022).

The Saver’s Credit

People with low-to-moderate earnings may be eligible for the saver’s credit, which is a dollar-for-dollar decrease in the amount of taxes owed. People who contribute to an IRA, 401(k), or any other qualified retirement account are eligible for the credit if their AGI falls under certain limits.

The income limit for the saver’s credit (also known as the retirement savings contribution credit) for 2021 is $66,000 for married couples filing jointly ($68,000 in 2022), $49,500 for heads of household ($51,000 in 2022), and $33,000 for singles and married individuals filing separately ($34,000 in 2022).

Required Minimum Distributions (RMDs)

RMDs for IRAs and defined contribution plans, such as profit sharing and 401(k) plans, have been waived for 2020. This includes your first RMD if you turned 7012 in 2019.

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RMDs, on the other hand, are returning in 2021. (and beyond).You must begin taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, and retirement plan assets by April 1 of the year after your 72nd birthday.

During the account owner’s lifetime, Roth IRAs have no required minimum distributions. If you don’t need the money, leave it alone and let it grow tax-free for your heirs.

Earned Income Tax Credit

The earned income tax credit (EITC) is a refundable tax credit that assists low-income taxpayers in reducing their tax liability dollar for dollar. Taxpayers may be eligible for a refund if they have no tax due for the year since this is a refundable tax credit. The EITC AGI restrictions and maximum credit amounts for 2021 and 2022 are as follows:

EITC for 2021
DependentsSingle or Head of HouseholdMarried Filing JointlyMaximum EITC
$21,430$27,380$1,502
1$42,158$48,108$3,618
2$47,915$53,865$5,980
3+$51,464$57,414$6,728

The income restrictions and maximum credits remain mostly same for 2022—unless you don’t have children, in which case you’ll have a more difficult time qualifying (and will get a lower credit if you do):

EITC for 2022
DependentsSingle or Head of HouseholdMarried Filing JointlyMaximum EITC
$16,480$22,610$560
1$43,492$49,622$3,733
2$49,399$55,529$6,164
3$53,057$59,187$6,935

Due to the COVID-19 epidemic, Congress enacted a “lookback rule” that lets taxpayers to compute their EITC in 2021 using either their 2019 or 2021 income, whichever results in a greater credit.

HSA Contribution Limits

Employee pay reductions for contributions to a health flexible spending account (FSA) are limited to $2,750 in 2021 and $2,850 in 2022.

People with self-only coverage in a medical savings account (MSA) must have an annual deductible of between $2,400 and $3,600 in tax year 2021 ($2,450 to $3,700 in 2022). For self-only coverage, the maximum out-of-pocket expenditure is $4,800 ($4,950 in 2022).

For participants with family coverage, the yearly deductible must be between $4,800 and $7,150 in 2021 ($4,950 to $7,400 in 2022). For tax year 2021, the out-of-pocket spending maximum for family coverage is $8,750 ($9,050 in 2022).

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Estate Tax Exemption and Annual Gift Exclusion

The standard estate tax exemption level for those who die in 2021 is $11.7 million (up from $11.58 million in 2020). The exemption increases to $12.06 million in 2022.

The yearly exclusion for gifts is $15,000 in 2020 and 2021, rising to $16,000 in 2022.

The Bottom Line

IRS inflation adjustments aim to maintain federal taxes in line with inflation, so staying up to date is important. It’s also a good idea to keep track of recent tax law changes, even if they have nothing to do with inflation. Knowing the most recent facts will assist you in planning for the 2021 tax year and beyond.

What Is the Deadline for Filing My 2021 Tax Return?

What Is the Standard Deduction for 2021?

On Form 1040 Schedule A, taxpayers may take the standard deduction or itemize their deductions. The following are the standard deductions for 2021:

  • Single and married filing separately taxpayers pay $12,550.
  • $18,800 for heads of household
  • $25,100 for married taxpayers filing jointly and surviving spouses

What Is the Estate Tax Exemption for 2021?

Most estates are too small to be subject to the federal estate tax, which applies only if the decedent’s estate assets are worth $11.7 million or more in 2021. In 2022, the exemption will be increased to $12.06. It’s worth noting that approximately a dozen states also have an estate tax.

Should I Hire a Tax Preparer or Use Tax Software?

The vast majority of Americans hire a tax preparer to submit their taxes. Nonetheless, tax preparation software (such as TurboTax) has made it simpler for consumers to prepare and submit their own taxes. The choice may be influenced by cost: Tax software is often less expensive than employing a tax professional. However, you should also evaluate the complexity of your return (use an expert if you run a company, experienced a significant life event, or wish to itemize), your tax skill, and your timetable. In general, doing your own tax return will save you money but not time. When you hire a tax professional, you will often save time but not money. Of course, a skilled tax preparer may save you more money than they charge, so that should be considered as well.

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