The Internal Revenue Service announced annual inflation adjustments for the 2021 tax year for more than 60 tax provisions, including standard deductions and the tax rate schedules.
More details can be found at “Revenue Procedure 2020-45” on the IRS website, but that document is dense and spans almost 30 pages. Here are the changes taken directly from IRS press release from October 26th instead.
The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
The personal exemption for tax year 2021 remains at 0, as it was for 2020; this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
Taxpayers still fall into one of seven brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. While those rates will remain unchanged in 2021, the tax brackets have been indexed to keep pace with cost-of-living adjustments.
Keep in mind that these rates are in effect for 2021 and will be used to prepare your tax returns in 2022:
For 2021, as in 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
Taxes are complicated enough and when you layer on the latest notice from the IRS (as well as previous notices), the thought of devising and implementing tax strategies that are most appropriate for you can be a daunting task.
Make sure you talk to your financial advisor as you are considering certain tax strategies. If nothing else, your financial advisor will confirm that the tax decisions you make are consistent with your overall financial plan.