2021 Income Tax: Top Five Changes

kienitz 2021 top 5 tax changes

It’s a brand new year, which means new income tax rules go into effect. Unlike previous years, most of the changes in 2021 are relatively minor. In this blog post, we’ll touch on five of these changes that are most likely going to affect the individual taxpayer.

2021 Tax Change #1: The Return of RMDs

Retirement savings account like IRAs and 401(k)s do not allow you to keep money in those accounts forever. By a certain age, the retirement savings account holder has to start withdrawing money.

Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, these required minimum distributions, or RMDs, start at age 72. But thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, there was a waiver of the RMD requirement, but only for 2020. In 2021, the RMD requirements set out in the SECURE Act go back into effect.

2021 Tax Change #2: Higher Income Limits for Retirements Savings Accounts

Unfortunately, 2021 does not bring about raised contribution limits for 401(k)s or IRAs. However, there will be slightly higher income limits concerning contribution or tax deduction benefits.

For example, the phase-out ranges for Roth IRA income limits are now:

  • $125,000 to $140,000 for single tax filers
  • $198,000 to $208,000 for married couples filing jointly
  • $0 to $10,000 for married couples filed separately

2021 Tax Change #3: Raised Gift Tax Lifetime Exclusion Amount

In 2020, an individual could give up to $11.58 million in gifts during the individual’s lifetime without having to worry about paying a gift tax. In 2021, this lifetime exclusion limit rises to $11.7 million.

Remember these are individual limits. Married couples can therefore have an effective lifetime gift tax exclusion amount that’s double this $11.7 million limit.

2021 Tax Change #4: A Bigger Standard Deduction

Ever since the Tax Cut and Jobs Act was signed into law, the standard deduction is far larger than it used to be. It basically doubled, which means for most taxpayers, it is far better to take the standard deduction instead of itemizing.

In 2021, the standard deduction is going up again, although only a small bit. The new standard deductions are:

  • Married, filing jointly = $25,100
  • Married, filing separately = $12,550
  • Single = $12,550
  • Head of household = $18,800

2021 Tax Change #5: The Saver’s Tax Credit Gets Slightly Better

To help lower and middle-income taxpayers save more money, there is the Saver’s Credit. Formerly known as the Retirement Savings Contributions Credit, this allows taxpayers to receive a tax credit that amounts to 10%, 20% or 50% of the contributions placed into a retirement savings account for a given tax year.

The maximum tax credit is $1,000 for individuals and $2,000 for married couples filing jointly. In 2021, the income limits for taxpayers eligible to receive the Saver’s Credit go up slightly. For instance, the income limits for a single taxpayer in 2021 are now:

  • $0 to $19,750 for a 50% of contribution tax credit
  • $19,751 to $21,500 for a 20% of contribution tax credit
  • $21,501 to $33,000 for a 10% of contribution tax credit

Conclusion

Most of the 2021 income tax changes are relatively small, and this blog post just mentions a few of the changes coming this year. Speak with a tax professional to learn more about what other 2021 changes might affect your taxes.


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