A new year brings new tax rate schedules and other updates from the Internal Revenue Service (IRS), including a new standard deduction, an increased Alternative Minimum Tax exemption, and changes to the capital gains tax thresholds.
Each year, the IRS makes inflation adjustments. The most recent updates apply to tax year 2021, which ends on December 31, 2021. Note, this is not to be confused with tax season 2021, which refers to the time period in 2021 during which tax year 2020 returns are prepared and filed.
While most of the changes are minor, they are still important to keep in mind.
Tax Brackets and Rates
Marginal tax rates for 2021 will remain the same as 2020 marginal tax rates, but income bracket thresholds have risen. The top rate is still 37% but now applies to income over $523,600 for individuals and income over $628,300 for married couples filing jointly (compared to $518,400 and $622,050, respectively, in 2020). Other rates and brackets for 2021 are:
- 35% for income between $209,426 and $523,600 for single individuals ($418,851-$628,300 for married filing jointly)
- 32% for income between $164,926 and $209,425 for single individuals ($329,851-$418,850 for married filing jointly)
- 24% for income between $86,376 and $164,925 for single individuals ($172,751-$329,850 for married filing jointly)
- 22% for income between $40,526 and $86,375 for single individuals ($81,051-$172,750 for married filing jointly)
- 12% for income between $9,951 and $40,525 for single individuals ($19,901-$81,050 for married filing jointly)
- 10% for single individuals with income of $9,950 or less ($19,900 for married couples filing jointly)
Standard and Itemized Deductions
The standard deduction for single individuals rose $150 for tax year 2021 to $12,550. The standard deduction for married filing jointly rose to $25,100. For tax year 2021, as in 2020, there is no limit on itemized deductions.
The Tax Cuts and Jobs Act of 2017 eliminated personal exemptions, which were specific amounts taxpayers were allowed to deduct for themselves and their dependents. These remain at $0 in 2021.
Alternative Minimum Tax (AMT)
The AMT exemption has also risen in tax year 2021. For single individuals, the exemption is $73,600 and begins to phase out at an income of $523,600 or higher. Married couples filing jointly enjoy an exemption of $114,600 in tax year 2021, with phase-out beginning at an income of $1,036,800. The exemption rose $700 for individuals and $1,200 for married couples filing jointly for tax year 2021.
Capital Gains Tax
The rates for long-term capital gains tax will remain the same for tax year 2021 as they were in 2020, but the income thresholds related to those rates rose. The long-term capital gains rates for 2021 are 0%, 15%, and 20% for assets held over a year. Short-term gains, those earned on assets held for less than a year, are taxed at an individual’s regular tax rate.
For tax year 2021, single individuals earning up to $40,400 and married couples filing jointly with an income of up to $80,800 pay 0% on long-term capital gains. In 2021, individuals with income between $40,401 and $445,850 and married couples filing jointly with incomes between $80,801 and $501,600 pay 15% on long-term gains. The rate rises to 20% for individuals with incomes over $445,850 and married couples filing jointly with incomes over $501,600.
These are just a few of the updates for tax year 2021. Check the IRS website for details on more adjustments. While the 2021 updates are minor, make sure to heed them when planning for and preparing your 2021 taxes.
Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer
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