It’s that time of year again where the new 2021 tax limit amounts are being announced. These amounts are those tax items which may adjust annually for inflation. As with prior years, some amounts are increasing for 2021, while others are remaining the same as 2020.
401(k) Deferral Amount
The maximum deferral for 2021 is $19,500, unchanged from 2020. For those 50 and older, the catch-up amount is $6,500 for 2021, also unchanged from 2020. These plans continue to be one of the principal savings vehicles individuals have for their retirement. It is also important for individuals to make sure they defer at least enough to attract the maximum match their employer may offer.
The maximum contribution amount for 2021 is $6,000, unchanged from 2020. The catch-up amount for those 50 and older is $1,000, also the same as it was for 2020. Phase-out ranges for both deductible IRAs and Roth IRAs have increased slightly for 2021, and are $1,000 – $2,000 higher. With the spectre of higher income tax rates in the future, it continues to be a good strategy to consider converting regular IRA amounts into your Roth IRA. Conversions do not have to be of the entire IRA balance, so you can choose an optimum amount to convert. The benefits of a Roth IRA, rather than a regular IRA, is there are no required minimum distributions to be taxed in future years. This makes the Roth IRA an incredibly flexible retirement asset, as it may be left untouched until later in retirement or even until your death. Although the Roth IRA must start to be liquidated upon your death, it still provides a nontaxable asset for your beneficiaries.
The estate and gift tax exemption rises to $11.7 million for 2021, increased from $11.58 million in 2020. For a married couple, this means the ability to shelter $23.4 million from the federal estate/gift tax. The annual gift exclusion amount for 2021 is $15,000, unchanged from 2020. With the estate/gift exemption scheduled to revert back in 2026 to roughly half the current level, continued emphasis on gifting substantial assets while the higher exemption remains in effect deserves your attention. For those looking to reduce their estate assets over time, making gifts of $15,000 to family members ($30,000 for husband and wife) annually is a “no-brainer.”
The maximum contribution for individuals with self-only high deductible health plan coverage is $3,600 for 2021, increased from $3,550 in 2020. The maximum contribution for individuals with family high deductible health plan coverage is $7,200 for 2021, increased from $7,100 for 2020. The catch-up contribution limit for those age 55 and older is $1,000 for 2021, unchanged from 2020. Maximizing contributions to your HSA account beyond your unreimbursed medical expenses is still a great strategy. This account can be built to supplement your other retirement accounts, since after age 65 the money may be withdrawn for any reason without penalty. You will pay income tax on the amounts, but no penalties!
Social Security Wage Base
The maximum earnings subject to social security taxes for 2021 is $142,800, increased from $137,700 in 2020. Social Security benefits will increase by 3.7% for 2021 from 2020.
Section 179 Deduction
The amount of qualifying property that may be currently deducted under §179 for 2021 is $1,050,000, increased from $1,040,000 in 2020. The amount of qualifying property at which the deduction begins to phase-out for 2021 is $2,620,000, up from $2,590,000 in 2020. Despite the availability of 100% bonus depreciation continuing for 2021, the ability to use the §179 deduction is still a valuable deduction in certain circumstances where bonus is not allowed or limited by state tax laws.
Other Retirement Plan Limits
The deferral limit for SIMPLE plans for 2021 is $13,500, unchanged from 2020. The limit for those 50 or older for 2021 is $16,500, also unchanged from 2020. The contribution limit for profit sharing and SEP plans for 2021 is $58,000, increased from $57,000 in 2020. The maximum compensation for calculating profit sharing and SEP contributions for 2021 is $290,000, increased from $285,000 in 2020.
The standard deduction amount for married filing jointly status for 2021 is $25,100, increased from $24,800 in 2020. For single status for 2021 it is $12,550, increased from $12,400 in 2020. For head of household status for 2021 it is $18,800, increased from $18,650 in 2020. For married filing separately status for 2021 it is $12,550, increased from $12,400 in 2020. If your itemized deductions do not exceed the amount for your filing status, then you will use these deduction amounts.
Let’s Make a Plan
Our Individual Tax Services Team can help you create a tax plan that minimizes tax liability at the federal, state and local level. We will provide a thorough evaluation of your current tax situation, help you apply new and changing standards, and give you recommendations for the future.
by Tom Flood, CPA, MST, CFP, PFS
Tom Flood joined ARB in 2012. He is a Senior Tax Manager specializing in tax consulting and tax issues relating to individual, partnership, nonprofit, construction and real estate, and corporate taxation. Tom’s extensive experience includes tax work in transactional and traditional tax planning and compliance.