2021 Tax Brackets & Retirement Contribution Limits

  by Robert Brauer

Stay up-to-date with the key 2021 figures recently released by the IRS.

IRS Figures for 2021 – What’s New?
As we approach the end of 2020, it is a good idea to start looking ahead to 2021 and how we will manage our finances in the coming year. Most investors will make contributions or take withdrawals from our accounts in 2021. Let’s take a moment to review some of the key figures that apply to retirement accounts, and how they may be changing for next year.

2021 Retirement Contribution Limits

Owners of traditional Individual Retirement Accounts (IRAs), Roth IRAs, and most employer-sponsored retirement plans will not see much change in 2021. For traditional and Roth IRAs, the annual contribution limit will remain steady at $6,000, with an additional $1,000 in “catch-up” contributions available to those who are age 50 or over. Please make note that the contribution limits are a combined total for all traditional and Roth IRAs owned by an individual.

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Employer-sponsored plans, such as the 401(k), 403(b), and 457 plans will also remain steady for 2021, with a continued contribution limit of $19,500 (with an additional $6,500 in “catch-up” contributions for those over 50).  SIMPLE IRAs (special retirement plans for businesses with under 100 employees) will have a contribution limit of $13,500, once again remaining the same as 2020.

2021 Tax Brackets

For 2021, the same seven tax brackets for earned income will be in effect as in 2020. These are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These brackets are the same over several different filing statuses (individual, married filing jointly, married filing separately, head of household).

Tax Brackets Single Married Filing Jointly
10% $0 – $9,950 $0 – $19,900
12% $9,951 – $40,525 $19,901 – $81,050
22% $40,526 – $86,375 $81,051 – $172,750
24% $86,376 – $164,925 $172,751 – $329,850
32% $164,926 – $209,425 $329,851 – $418,850
35% $209,426 – $523,600 $418,851 – $628,300
37% Over $523,600 Over $628,300

For trusts and estates, the tax bracket is somewhat simplified. There will be only four brackets in 2021, at rates of 10%, 24%, 35% and 37%.

Tax Bracket Taxable Income Tax Due
10% $0 – $2,650 10% of Income
24% $2,651 – $9,550 $265 + 24% of amount over $2650
35% $9,551 – $13,050 $1,921 + 35% of amount over $9,550
37% Over $13,051 $3,146 + 37% of amount over $13,050

The standard deduction used by most filers on their tax returns will be increasing slightly in 2021. For individuals and married filing separately, the standard deduction will increase to $12,550 (up from $12,400 in 2020). For married filing jointly, the deduction will be $25,100 (up from $24,800 in 2020). For head of household, the deduction will be $18,800 (up from $18,650).

Filing Status Standard Deduction
Single $12,550
Married Filing Jointly $25,100
Married Filing Separately $12,550
Head of Household $18,800

2021 Contribution Phaseouts

If you own a traditional IRA that you make contributions to during a given tax year, you are generally allowed to take a tax deduction for your total contribution. However, this deduction begins to “phase out” (reduce in value) once your income exceeds a particular amount. The amount of the deduction then reduces gradually to zero when income reaches a second, higher amount.

For 2021, when income reaches $66,000, the phase-out of the IRA deduction will begin. The phase-out then continues until income reaches $76,000, at which point the deduction reaches zero. These two figures are slightly increased from the 2020 range of $65,000 to $75,000. Married persons filing jointly will have a range of $105,000 to $125,000 (up from $104,000 to $124,000) and $198,000 to $208,000 (up from $196,000 to $206,000) if the spouse who is contributing to the IRA is not covered by an employer-sponsored retirement plan.

For Roth IRAs, although there is no tax deduction for contributions, the amount that you can contribute begins to decrease after a certain income level is earned. For individuals, income must be below $125,000 to make the full contribution. After exceeding this level, the contribution amount phases out until $140,000 when it reaches zero. The maximum of $125,000 that can be earned without incurring the phase-out is increased from $124,000 in 2020. Married persons filing jointly begin the phase-out at $198,000 (up from $196,000) and reach zero at $208,000.

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Social Security COLA Adjustment

Social Security and Supplemental Security Income (SSI) benefits will see a cost-of-living-adjustment (COLA) for 2021. Benefits will increase by 1.3%, and the maximum amount of earnings subjected to Social Security tax will increase to $142,800 (up from $137,700 in 2020).

Miscellaneous Figures

A few miscellaneous figures that may be of some importance to you:

  • Alternative Minimum Tax: the exemption amount for calculation of the alternative minimum tax (AMT) is increased for single and married filers for 2021. Single filers have an exemption of $73,600 (up from $72,900) while married filers have an exemption of $114,600 (up from $113,400).
  • Capital Gains Tax Brackets: Capital gains rates will have the same three brackets as in 2020; these are 0%, 15%, or 20%. The majority of filers will pay 15%; the 20% rate only applies to those filers whose income incurs the 37% rate on earned income in 2021.
  • Estate Tax Exemption: For 2021, the federal estate tax exemption amount is $11.7 million per individual or a combined $23.4 million for a married couple. These are increased from $11.58 million and $23.16 million in 2020, respectively.
  • Required Minimum Distributions: RMDs were suspended for 2020 as part of the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Barring another act of Congress, RMDs are scheduled to resume in 2021. Make note of the fact that the minimum age to begin taking RMDs has been increased to 72; this change was originally intended to go into effect for 2020.

Overall, the changes to the various figures described herein are generally modest, if indeed there are any at all. If you would like to discuss how the changes might affect you and your own accounts, we are always here to help.

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