Everyone’s hoping that 2021 will be a lot different from how 2020 was. But when it comes to your 2021 income taxes, the IRS isn’t planning on a huge transformation like we saw back in 2018.
Even without major tax reform, however, you still have to go through the minor changes that happen to your taxes every single year. Below, you’ll find the information you need on some of the most important ones, including:
- Higher standard deductions
- Changes to key provisions for popular tax credits
- Contribution limits and income thresholds for retirement accounts like IRAs and 401(k)s
- Increases in other tax-favored accounts for healthcare and education
- Exemptions from gift and estate tax
- Tax brackets for ordinary income as well as qualified dividends and long-term capital gains
Let’s take a more comprehensive look at all of these tax issues to help you create a better tax plan for 2020.
What is the standard deduction for 2021?
Most people take the standard deduction rather than itemizing. It’s far less work, and the amounts are now high enough that only a small percentage of taxpayers gets a bigger break by itemizing their deductions.
Annual inflation adjustments brought a modest rise in standard deductions for 2021:
| Filing Status | Standard Deduction for 2021 Tax Year | Change from 2020 |
|---|---|---|
| Single | $12,550 | +$150 |
| Married filing jointly | $25,100 | +$300 |
| Head of household | $18,800 | +$150 |
| Married filing separately | $12,550 | +$150 |
In addition to these base standard deductions, those who are 65 or older or are blind get an extra add-on. For those who are married, the added amount is $1,350, while singles get to add $1,700. Both of those figures are $50 higher in 2021 than they were in 2020. If you’re 65 or older and blind, then you can boost your standard deduction by double the relevant amount. Moreover, for joint filers, each spouse has an opportunity to get these added amounts. So married couples in which both spouses are over 65 and are blind would see their standard deduction increase by $5,400 — or $1,350 times four.
The standard deduction amount for those minor children who have to file income tax returns remained the same in 2021 as it was in 2020. Children always get at least $1,100 as a standard deduction, and if they get more than $750 in earned income from work, then the standard deduction is their total earned income plus $350 more up to the regular standard deduction in the table above.
What’s changing with popular tax credits in 2021?
Tax credits reduce your tax bill dollar-for-dollar, making them more valuable than deductions. Some of the most popular credits include the earned income tax credit, the child tax credit, the saver’s credit, and two educational tax credits.
The earned income tax credit gives sizable reductions in taxes to workers with low- or mid-level incomes. The credit amount varies by family size and income, with maximums of $6,728 for those with three or more children (up $68 from 2020), $5,980 for those with two children (up $60), $3,618 for those with one child (up $34), or $543 for those with no children (up $5). The income limits below indicate which taxpayers are eligible for at least some of the earned income credit, but bear in mind that the top credit amount phases out gradually over a large portion of the income range. The income amounts are up slightly from last year.
| Filing Status | Income Limit if No Children | Income Limit if 1 Child | Income Limit if 2 Children | Income Limit if 3+ Children |
|---|---|---|---|---|
| Single, Head of Household, or Widowed | $15,980 | $42,158 | $47,915 | $51,464 |
| Married Filing Jointly | $21,920 | $48,108 | $53,865 | $57,414 |
A special thing about the earned income tax credit is that even if you don’t owe anything in taxes, you can still get the credit amount back from the IRS in the form of a refund. As you can imagine from the chart, a credit of several thousand dollars for workers earning less than $57,000 — in some cases, much less — can make a big financial difference for families struggling to make ends meet.
The saver’s tax credit pays as much as $1,000 per person to encourage retirement contributions. It’s designed for low- to middle-income taxpayers. Depending on your income, you can get a credit for 10%, 20%, or 50% of up to $2,000 in contributions to an IRA, 401(k), or similar retirement account. The following income limitations apply, and above the top amount, no credit is available. The income limits below are up slightly from year-ago levels.
| Credit Percentage | Single or Married Separate | Head of Household | Married Joint |
|---|---|---|---|
| 50% of contribution | $0 to $19,750 | $0 to $29,625 | $0 to $39,500 |
| 20% of contribution | $19,751 to $21,500 | $29,626 to $32,250 | $39,501 to $43,000 |
| 10% of contribution | $21,501 to $33,000 | $32,251 to $49,500 | $43,001 to $66,000 |
Finally, among two educational tax credits, one is seeing minor changes. The Lifetime Learning tax credit offers additional educational tax breaks even beyond traditional college. A 20% credit on up to $10,000 in eligible expenses every year is available to taxpayers making less than $59,000 in 2021 if they’re single or $119,000 if they’re filing jointly, with reduced credits available up to $69,000 in income for singles and $139,000 for joint filers. This credit is available for graduate school, vocational training, and certain other nontraditional educational expenses. Those numbers are unchanged for singles but up $1,000 from 2020 levels for joint filers.
What’s changing in retirement tax planning for 2021?
Retirement accounts are the most important tools you have to control your taxes. You can often get upfront deductions to save for retirement, and you also get valuable tax deferral while money stays in those accounts.
2021 isn’t shaping up to be a big year for changes to key items like contribution limits for IRAs and 401(k)s. IRA contribution limits will be the same in 2021 as they were in 2020: $6,000 for those younger than 50 and $7,000 for those 50 or older. Similarly, 401(k) contribution limits will remain $19,500 for those under 50 and $26,000 for those 50 or older.
However, there are other aspects of IRAs, 401(k)s, and other retirement accounts that have subtle changes each year — specifically, the income limits that apply. Traditional IRAs always allow you to make contributions regardless of income, but you can’t always deduct those contributions. Meanwhile, Roth IRAs can prohibit you from making contributions if your income is too high.
The applicable limits for 2021 are below. Below the phase-out range, you’re entitled to a full contribution or deduction. Above it, no contribution or deduction is allowed. With it, you can only deduct or contribute a portion of the $6,000 or $7,000 maximum.
| Filing Status | Roth IRA Phase-Out Range | Traditional IRA Phase-Out Range if Worker Has Employer-Sponsored Retirement Account | Traditional IRA Phase-Out Range if Spouse Has Employer-Sponsored Retirement Account |
|---|---|---|---|
| Single | $125,000 to $140,000 | $66,000 to $76,000 | N/A |
| Married filing jointly | $198,000 to $208,000 | $105,000 to $125,000 | $198,000 to $208,000 |
| Married filing separately | $0 to $10,000 | $0 to $10,000 | $0 to $10,000 |
No such income limits apply to 401(k) contributions. That’s part of what makes them especially valuable for high-income taxpayers.
What other tax-favored accounts are available in 2021?
There are other ways to save on your taxes. In the educational realm, 529 plans and Coverdell ESAs let you set money aside for educational purposes, with tax-free treatment as long as you use the money on qualifying expenses. There are no income limits on 529 plans, but income limits of $95,000 to $110,000 for single filers and $190,000 to $220,000 for joint filers apply to reduce or eliminate the ability to make the maximum Coverdell contribution of $2,000 per year.
For healthcare expenses, those with high-deductible health insurance coverage can use health savings accounts to set money aside for future care costs. Contribution amounts of up to $3,600 for those with self-only policies or $7,200 for family policies apply in 2021, with minimum annual deductibles of $1,400 or $2,800 respectively required to qualify for high-deductible health plan status. Catch-up contributions of $1,000 are available if you’re 55 or older, but a qualifying plan must have maximum out-of-pocket expenses of $7,000 for self-only policies or $14,000 for family coverage.
What are estate taxes in 2021?
For high net worth individuals, the gift and estate tax lifetime exclusion amount is a key figure of how much wealth you can pass on to the next generation without paying tax. In 2021, this amount rises to $11.7 million, up from $11.58 million in 2020.
More people focus on the annual gift tax exclusion amount. That lets people give up to $15,000 per year to as many different recipients as they want in 2021. That amount is unchanged from 2020’s level.
What are the tax brackets for 2021?
Your tax rate depends on your income. In the U.S., the more income you earn, the higher your tax rate gets on every extra dollar of earnings. That marginal rate doesn’t apply to all of your income — only the income with certain brackets.
Below, you’ll see the tax brackets for 2021. The set that applies to you depends on your tax filing status.
If you file as a single taxpayer, the following brackets apply:
| Bracket for Singles | Tax is this amount plus this percentage | Of the amount over |
|---|---|---|
| $0 to $9,950 | $0 plus 10% | $0 |
| $9,950 to $40,525 | $995 plus 12% | $9,950 |
| $40,525 to $86,375 | $4,664 plus 22% | $40,525 |
| $86,375 to $164,925 | $14,751 plus 24% | $86,375 |
| $164,925 to $209,425 | $33,603 plus 32% | $164,925 |
| $209,425 to $523,600 | $47,843 plus 35% | $209,425 |
| Above $523,600 | $157,804.25 plus 37% | $523,600 |
Those who qualify as head of household have higher income thresholds apply to each tax bracket, resulting in lower tax. To qualify as a head of household, the requirements include that you be unmarried and provide both housing and financial support for a child, parent, or other relative who lives with you for greater than half of the year. The financial support you provide must generally be more than half of all support the child or other relative received during the year.
| Bracket for Head of Household | Tax is this amount plus this percentage | Of the amount over |
|---|---|---|
| $0 to $14,200 | $0 plus 10% | $0 |
| $14,200 to $54,200 | $1,420 plus 12% | $14,200 |
| $54,200 to $86,350 | $6,220 plus 22% | $54,200 |
| $86,350 to $164,900 | $13,293 plus 24% | $86,350 |
| $164,900 to $209,400 | $32,145 plus 32% | $164,900 |
| $209,400 to $523,600 | $46,385 plus 35% | $209,400 |
| Above $523,600 | $156,355 plus 37% | $523,600 |
Most married taxpayers file jointly. If you were married but your spouse passed away recently, then you’re also allowed to use these brackets as a surviving spouse.
| Bracket for married filing jointly | Tax is this amount plus this percentage | Of the amount over |
|---|---|---|
| $0 to $19,900 | $0 plus 10% | $0 |
| $19,900 to $81,050 | $1,990 plus 12% | $19,900 |
| $81,050 to $172,750 | $9,328 plus 22% | $81,050 |
| $172,750 to $329,850 | $29,502 plus 24% | $172,750 |
| $329,850 to $418,850 | $67,206 plus 32% | $329,850 |
| $418,850 to $628,300 | $95,686 plus 35% | $418,850 |
| Above $628,300 | $168,993.50 plus 37% | $628,300 |
Some married taxpayers choose to file separate returns. These are the brackets that apply.
| Bracket for married filing separately | Tax is this amount plus this percentage | Of the amount over |
|---|---|---|
| $0 to $9,950 | $0 plus 10% | $0 |
| $9,950 to $40,525 | $995 plus 12% | $9,950 |
| $40,525 to $86,375 | $4,664 plus 22% | $40,525 |
| $86,375 to $164,925 | $14,751 plus 24% | $86,375 |
| $164,925 to $209,425 | $33,603 plus 32% | $164,925 |
| $209,425 to $314,150 | $47,843 plus 35% | $209,425 |
| Above $314,150 | $84,496.75 plus 37% | $314,150 |
Finally, there are some trusts that get taxed as separate legal entities. The same is true of estates of someone who passes away.
| Bracket for trusts and estates | Tax is this amount plus this percentage | Of the amount over |
|---|---|---|
| $0 to $2,650 | $0 plus 10% | $0 |
| $2,650 to $9,550 | $265 plus 24% | $2,600 |
| $9,550 to $13,050 | $1,921 plus 35% | $9,450 |
| Above $13,050 | $3,146 plus 37% | $12,950 |
What’s the 2021 tax rate on long-term capital gains and qualified dividends?
If you have certain dividends that qualify, or if you have capital gains on investments you’ve held for longer than a year, then you can get a lower tax rate on that portion of your income. The brackets below tell you the rate for 2021.
| Tax Rate on Income | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
|---|---|---|---|---|
| 0% | Up to $40,400 | Up to $80,800 | Up to $54,100 | Up to $40,400 |
| 15% | $40,400 to $445,850 | $80,800 to $501,600 | $54,100 to $473,750 | $40,400 to $250,800 |
| 20% | Above $445,850 | Above $501,600 | Above $473,750 | Above $250,800 |
Dividends on most U.S. stocks qualify, but payouts on certain investments like real estate investment trusts don’t. If you sell an investment after holding it for a year or less, then your regular rate will apply.
Get a head start on your 2021 taxes
There are plenty of other minor tax issues that changed between 2020 and 2021, but these are some of the most important. By getting a handle on these changes, you’ll be able to start early with tax planning and put yourself in position to save as much as you can on your tax bill.
