Thankfully, every year we get a little heads up as to what to expect in order to make the best financial decisions for our households. For a lot of people, these changes may seem insignificant and they may go about their daily lives as though nothing has changed.
But we’re firm believers that before you make any New Years’ resolutions, you have to know what the new year has in store.
1. Tax Brackets Increase for All Filing Statuses
Everyone in the U.S. falls under different tax brackets. Thanks to inflation, these are adjusted on a yearly basis. In 2021, here are the minimum income levels for the top tax brackets for every filing status.
In 2020, for singles, it was $518,401. In 2021, that figure changes to $523,601.
For the head of household, $523,601, up from $518,401 in 2020.
If you’re married and filing separately, it’s $314,150, compared to $311,026 in 2020. For married couples filing jointly, it’s $628,301 compared to last year’s $622,051.
2. Employer-Sponsored Retirement Contribution Limits Increase
In terms of contribution limits, these have no chance from 2021 for elective deferrals to 401(k), most 457 plans, 403(b), and the federal government’s Thrift Savings Plan, staying at $19,500.
You and your employer can contribute up to $58,000 to a plan, compared to last year’s $57,000.
Sorry, seniors over the age of 50, the number of catch-up contributions you can save up remains the same, $6,500.
3. Traditional IRA Income Restrictions to Deduct Contributions Rise
In terms of IRAs, contribution limits remain the same, meaning you can contribute $6,000 if you are under the age of 50 and $7,000 if you’re older.
But there are other changes that are coming to Traditional IRAs in 2021. Those who are also covered by an employer-sponsored plan should know the know income limits when you’ll still get a deduction for contribution increases.
For those who are married and filing jointly, the maximum deduction is reduced at $104,000, compared to 2020s $103,000. It is also completely eliminated at $124,000 ($123,000 in 2020).
For single filers, the maximum deduction is reduced too in 2021, at $65,000 compared to $64,000 in 2020. Furthermore, this is eliminated at $124,000, but it used to be eliminated at $123,000 in 2020.
Changes are coming even if your spouse is covered but you are not. In this case, your maximum deduction is reduced to $198,000 (from $196,000) and is eliminated completely at $208,000, whereas it used to be $206,000 in 2020.
4. Income Limits to Contribute to a Roth IRA Rise
Many people opt for opening Roth IRAs in order to pay fewer taxes during retirement, however, not everyone is able to. If your income is too high, you cannot make contributions.
In 2021, income limits will be changed too.
Joint filers can make reduced contributions if their modified adjusted gross income is $198,000, whereas this limit used to be $196,000 in 2020. You cannot make any contributions at $208,000, $2,000 higher than in 2020.
Single filers can make maximum contributions if their modified adjusted gross income is $125,000 compared to last year’s $124,000. You will not be able to make any contributions at $140,000 compared to $139,000 in 2020.
5. Standard Deduction Rises for All Filing Statuses
Are you going with the standard or itemized deduction in 2021? These changes might make you change your approach compared to what you did in 2020, so be careful and pick the right choice for your finances!
For married couples filing separately, the standard deductions sit at $12,550 ($12,400 in 2020) while for those who file jointly it’s at $25,100 ($24,800 in 2020).
For single filers, it’s $12,550 compared to $12,400 in 2020 and for the head of the household, $18,800 ($18,650 in 2020).
6. Still No Limitation on Itemized Deductions
Itemized deductioners, rejoice! There still no limit in sight. Before 2018 you were limited if your income was too high, but thanks to the Tax Cuts and Jobs Act, this limit was abolished for itemized deductions- and this new rule will stay in place until 2025.
Your itemized deductions for taxes paid, charitable gifts, interest paid, job expenses, and other deductions will be available until 2025, after which we have to look out for any changes. Either a new tax law will be passed or the limitation on itemized deductions based on income will be restored.
For some, though, this might not even matter at all since they might opt for the standard deduction, especially since it doubled thanks to the Tax Cuts and Jobs Act.
7. Personal Exemptions Remain Unavailable
The Tax Cuts and Jobs act changed more than the itemized and standard deduction. Back then, what was known as the personal exemption was $4,150, but this was eventually eliminated.
However, have you ever wondered why Uncle Sam decided to do without this personal exemption?
You used to be able to claim one per dependent, including yourself and your spouse if you were married and filing jointly, plus anyone who qualified as an additional dependent. By eliminating this, Uncle Sam decided to give the standard deduction a massive boost.
There may be changes in the future, though, as it’s not impossible for the personal exemption to return. But, for 2021, if you were hoping for this exemption then you may as well go for the standard deduction.
8. HSA Contribution Limits Go Up
If you’re worried about future medical expenses or if you just want to ensure you’ll have enough money for unforeseen circumstances when you retire, it’s a good idea to open an HSA.
These allow you to save money in special, tax-advantaged accounts.
In 2021, contribution limits are going up, meaning you’ll be able to stash away $3,600 for self-only coverage and $7,200 for family coverage. The self-only coverage limit used to be $3,550 while the family coverage used to be $7,150 in 2020.
9. Estate Tax Exemption Limits Rise; Gift Tax Limits Remain the Same
In 2020, the estate tax exemption limit sat at $11.58 but in 2021 that exemption is going to rise to $11.7.
But don’t worry, at least gift tax limits are less confusing by staying the same… since 2018! The gift tax annual exclusion remains $15,000.
10. Transportation Fringe Benefit Limit Remains the Same
Any cash payments you receive from your employer, as well as any other benefits your employer pays on your behalf, must be included in your tax report. Still, there are certain exceptions to this rule, known as fringe benefits.
If your employer provides you with $270 for transportation benefits each money, such as a public transportation pass or free parking, this bonus will not increase your taxable income.
For 2021, no changes will be made to transportation fringe benefits, so no worries!
