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 tax returns filed by taxpayers in 2022), there are a few changes that you should know about.
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.
In very simple terms, the standard deduction is a specific dollar amount that reduces your taxable income.
Certain thresholds and ceilings for participants in Medical Savings Accounts will also be increased:
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.
These phase-outs do not apply if neither are covered by an employer-sponsored retirement plan.
The fact is that the CARES Act was by far the largest economic bill in America's history and the second COVID relief details are part of a bill that is over 5,000 pages long. Further, with a federal tax code that is over 2,500 pages, no wonder tax strategies can be overwhelming.
So, before you go down a path that might not be in your best interest long–term, make sure you consult with your financial advisor to determine how the new tax changes and new tax bills might impact you and your family.