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IRS Issues Inflation-Adjusted Amounts for 2021
(Parker Tax Publishing November 2020)
The IRS announced the tax year 2021 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. The tax year 2021 adjustments generally are used on tax returns filed in 2022. Rev. Proc. 2020-45.
On October 26, 2020, the IRS announced the tax year 2021 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Rev. Proc. 2020-45 provides details about these annual adjustments. The tax year 2021 adjustments generally are used on tax returns filed in 2022.
Rev. Proc. 2020-45 reflects the increased penalty amount under Code Sec. 6651(a) for failure to file a tax return within 60 days of the due date of the return (determined with regard to any extensions), as enacted by the Further Consolidated Appropriation Act, 2020 (the Act). The Act increased the penalty to the lesser of $435 (previously $330) or 100 percent of the amount required to be shown as tax for returns required to be filed after December 31, 2019. The $435 is adjusted for inflation under Code Sec. 6651(j)(1).
The following is a roundup of the key inflation adjusted tax numbers for 2021 from Rev. Proc. 2020-45.
Taxable Income Subject to the Maximum Rates
For tax year 2021, the top tax rate is 37 percent for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The tax rates for income levels less than those are:
(1) 35 percent, for incomes over $209,425 (single and married filing separately), $209,400 (head of household), $418,850 (married couples filing jointly);
(2) 32 percent for incomes over $164,925 (single and married filing separately), $164,900 (head of household), $329,850 (married couples filing jointly)
(3) 24 percent for incomes over $86,375 (single and married filing separately), $86,350 (head of household), $172,750 (married couples filing jointly);
(4) 22 percent for incomes over $40,525 (single and married filing separately), $54,200 (head of household), $81,050 (married couples filing jointly);
(5) 12 percent for incomes over $9,950 (single and married filing separately), $14,200 (head of household), $19,900 (married couples filing jointly); and
(6) the lowest rate is 10 percent for incomes of $9,950 or less (single and married filing separately), $14,200 or less (head of household), $19,900 or less (married couples filing jointly).
The maximum estate and trust tax rate is 37 percent on income over $13,050.
Maximum Capital Gains Rate
For tax years beginning in 2021, the maximum zero capital gain tax rate amount is $80,800 in the case of a joint return or surviving spouse, $54,100 in the case of an individual who is a head of household, $40,400 in the case of any other individual (other than an estate or trust), and $2,700 in the case of an estate or trust. The maximum 15-percent capital gain tax rate amount is $501,600 in the case of a joint return or surviving spouse ($250,800 in the case of a married individual filing a separate return), $473,750 in the case of an individual who is the head of a household, $445,850 in the case of any other individual (other than an estate or trust), and $13,250 in the case of an estate or trust.
Unearned Income of Minor Children
For 2021, the amount in Code Sec. 1(g)(4)(A)(ii)(I), which is used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax," is $1,100. This $1,100 amount is the same as the amount provided in Code Sec. 63(c)(5)(A), as adjusted for inflation. The same $1,100 amount is used for purposes of Code Sec. 1(g)(7) in determining whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax". For example, one of the requirements for the parental election is that a child's gross income is more than the amount referenced in Code Sec. 1(g)(4)(A)(ii)(I) but less than 10 times that amount. Thus, a child's gross income for 2021 must be more than $1,100 but less than $11,000.
Standard Deduction Amounts
The standard deduction for married filing jointly rises to $25,100 for 2021 (up from $24,800). For single taxpayers and married individuals filing separately, the standard deduction increases to $12,550 for 2020, up $150, and for heads of households, the standard deduction will be $18,800 for 2020 (up from $18,650).
The standard deduction amount under for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of (1) $1,100 (same as last year), or (2) the sum of $350 and the individual's earned income.
For 2021, the additional standard deduction amount under for the aged or the blind is $1,350. The additional standard deduction amount is increased to $1,700 if the individual is also unmarried and not a surviving spouse.
Itemized Deduction Limitation
As with 2020, there is no overall limitation on itemized deductions. The limitation on itemized deductions was eliminated by the Tax Cuts and Jobs Act (TCJA) through 2025.
Personal Exemptions
As with 2020, no personal exemptions are allowed for 2021. Personal exemptions were eliminated by TCJA through 2025.
Gross Income Limitation for a Qualifying Relative
For 2021, the exemption amount in Code Sec. 152(d)(1)(B) for a qualifying relative is $4,300 (same as last year).
Alternative Minimum Tax
The alternative minimum tax (AMT) exemption amount under Code Sec. 55(d)(1) for 2021 for unmarried individuals other than surviving spouses, married individuals filing joint returns and surviving spouses, and married individuals filing separate returns is $73,600 (up from $72,900), $114,600 (up from $113,400), and $57,300 (up from $56,700), respectively. The exemption for estates and trusts is $25,700 (up from $25,400). Under Code Sec. 55(b)(1), the excess taxable income above which the 28 percent AMT tax rate applies is $99,950 for married filing separately and $199,900 for all other returns.
The AMT exemption begins to phase out at $518,400 (up from $510,300) for unmarried individuals other than surviving spouses and married individuals filing separate returns, $1,036,800 (up from $1,020,600) for married individuals filing joint returns and surviving spouses, and $84,800 (up from $83,500) for estates and trusts.
Earned Income Credit
The 2021 maximum earned income credit amount is $6,728 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,660 for 2020. Rev. Proc. 2020-45 has a table providing maximum credit amounts for other categories, income thresholds, and phase-outs.
Qualified Business Income
For tax years beginning in 2021, the threshold amount under Code Sec. 199A(e)(2) is $329,800 (up from $326,600) for married filing joint return, $164,925 (up from $163,300) for married filing separate returns, and $164,900 for single and head of household returns (up from $163,300).
Limitation on Use of Cash Method of Accounting
For tax years beginning in 2021, a corporation or partnership meets the gross receipts test of Code Sec. 448(c) for any tax year if the average annual gross receipts of such entity for the three-taxable-year period ending with the taxable year which precedes such tax year does not exceed $26 million (same as last year).
Threshold for Excess Business Loss
For tax years beginning in 2021, in determining a taxpayer's excess business loss, the amount under Code Sec. 461(l)(3)(A)(ii)(II) is $262,000 ($524,000 for joint returns) (up from $259,000 and $518,000).
Estate Tax Exclusion
Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000 (up from $11,580,000 for estates of decedents who died in 2020).
Valuation of Qualified Real Property in Decedent's Gross Estate
For an estate of a decedent dying in calendar year 2021, if the executor elects to use the special use valuation method under Code Sec. 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use Code Sec. 2032A for purposes of the estate tax cannot exceed $1,190,000 (up from $1,180,000).
Interest on a Certain Portion of the Estate Tax Payable in Installments
For an estate of a decedent dying in calendar year 2021, the dollar amount used to determine the "2-percent portion" (for purposes of calculating interest under Code Sec. 6601(j)) of the estate tax extended as provided in Code Sec. 6166 is $1,590,000 (up from $1,570,000).
Penalty for Failure to File Tax Return
In the case of any return required to be filed in 2022, the amount of the addition to tax under Code Sec. 6651(a) for failure to file a tax return within 60 days of the due date of such return (determined with regard to any extensions of time for filing) must not be less than the lesser of $435 (up from $330) or 100 percent of the amount required to be shown as tax on such returns.
Penalty for Failure to File a Partnership Return
In the case of any partnership return required to be filed in 2022, the dollar amount used to determine the amount of the penalty under Code Sec. 6698(b)(1) is $210 (same as last year).
Penalty for Failure to File an S Corporation
In the case of any S corporation return required to be filed in 2022, the dollar amount used to determine the amount of the penalty under Code Sec. 6699(b)(1) is $210 (same as last year).
Limit on Employee Contributions to FSAs
The annual dollar limit for 2021 on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) is $2,750 (same as last year).
Small Employer Health Insurance Credit
Under the small business health care tax credit, the maximum credit for 2021 is phased out based on the employer's number of full-time equivalent employees in excess of 10 and the employer's average annual wages in excess of $27,800 (up from $27,600).
Gift Tax Exclusions
The 2021 annual exclusion for gifts is $15,000 (same as last year). For 2021, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $159,000 (up from $157,000).
AMT Exemption for a Child Subject to the Kiddie Tax
For 2021, for a child to whom the "kiddie tax" applies, the exemption amount under Code Sec. 55(d) and Code Sec. 59(j) for purposes of the alternative minimum tax may not exceed the sum of (1) the child's earned income for the taxable year, plus (2) $7,950 (up from $7,900).
Election to Expense Certain Depreciable Assets
For 2021, the aggregate cost of any Code Sec. 179 property that a taxpayer elects to treat as an expense cannot exceed $1,050,000 (up from $1,040,000 in 2020). The $1,050,000 limitation is reduced (but not below zero) by the amount the cost of Code Sec. 179 property placed in service during the 2021 tax year exceeds $2,620,000 (up from $2,590,000).
Foreign Earned Income Exclusion Amount
For 2021, the foreign earned income exclusion rises to $108,700 (up from $107,600).
U.S. Savings Bond Interest Exclusion for Higher Education Expenses
The exclusion from income for U.S. savings bond interest for taxpayers who pay qualified higher education expenses, begins to phase out for modified adjusted gross income above $124,800 for joint returns (up from $123,550) and $83,200 (up from $82,350) for all other returns. The exclusion is completely phased out for modified adjusted gross income of $154,800 for joint returns and $98,200 for all other returns (up from $153,550 and $97,350, respectively, in 2020).
Interest on Education Loans
For tax years beginning in 2021, the $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with modified adjusted gross income in excess of $70,000 ($140,000 for joint returns) (same as last year), and is completely phased out for taxpayers with modified adjusted gross income of $85,000 or more ($170,000 or more for joint returns).
Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising Campaigns
For tax years beginning in 2021, for purposes of defining the term "unrelated trade or business" for certain exempt organizations under Code Sec. 513(h)(2), "low cost articles" are articles costing $11.30 (up from $11.20) or less.
For tax years beginning in 2021, under Code Sec. 170, the $5, $25, and $50 guidelines in Section 3 of Rev. Proc. 90-12, for the value of insubstantial benefits that may be received by a donor in return for a contribution, without causing the contribution to fail to be fully deductible, are $11.30, $56.50, and $113 (up from $11.20, $56, and $112), respectively.
Medical Savings Accounts
For 2021, for purposes of medical savings accounts, a "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,400 (up from $2,350) and not more than $3,600 (up from $3,550), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,800 (up from $4,750).
For family coverage in tax years beginning in 2021, the term "high deductible health plan" means a health plan that has an annual deductible that is not less than $4,800 (up from $4,750) and not more than $7,150 (up from $7,100), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,750 (up from $8,650).
Long-Term Care Premiums
For 2021, the limitations for eligible long-term care premiums includible in the term "medical care" are: for individuals 40 years or less before the close of the tax year, $450 (up from $430); for individuals more than 40 but not more than 50, $850 (up from $810); more than 50 but not more than 60, $1,690 (up from $1,630); more than 60 but not more than 70, $4,520 (up from $4,350); and more than 70, $5,640 (up from $5,430).
Periodic Payments Received under Qualified Long-Term Care Insurance Contracts or under Certain Life Insurance Contracts
For calendar year 2021, the stated dollar amount of the per diem limitation under Code Sec. 7702B(d)(4), regarding periodic payments received under a qualified long-term care insurance contract or periodic payments received under a life insurance contract that are treated as paid by reason of the death of a chronically ill individual, is $400 (up from $380).
Attorney Fee Award Limitation
The attorney fee award limitation is $210 per hour (same as last year).
Child Adoptions
The credit allowed for an adoption in 2021 of a child with special needs is $14,440 (up from $14,300). The maximum credit allowed for other adoptions is the amount of qualified adoption expenses up to $14,440 (up from $14,300). The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $216,660 and is completely phased out for taxpayers with modified adjusted gross income of $256,660 or more (up from $214,520 and $254,520, respectively).
Lifetime Learning Credit
The Lifetime Learning Credit is an amount equal to 20 percent of qualified tuition and related expenses not in excess of $10,000. Accordingly, the maximum Lifetime Learning Credit is $2,000. For 2021, a taxpayer's modified adjusted gross income in excess of $59,000 ($119,000 for a joint return) is used to determine the reduction in the amount of the Lifetime Learning Credit otherwise allowable (up from $59,000 and $118,000, respectively).
Qualified Transportation Fringe Benefit
For tax years beginning in 2021, the monthly limitation regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $270 (same as last year). The monthly limitation for the fringe benefit exclusion amount for qualified parking is $270 (same as last year).
Certain Expenses of Elementary and Secondary School Teachers
For tax years beginning in 2021, the amount of the deduction for expenses paid or incurred by an eligible educator in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by an eligible educator in the classroom is $250 (same as last year).
Transportation Mainline Pipeline Construction Industry Optional Expense Substantiation Rules for Payments to Employees under Accountable Plans
For calendar year 2021, an eligible employer may pay certain welders and heavy equipment mechanics an amount of up to $18 per hour (same as last year) for rig-related expenses that are deemed substantiated under an accountable plan if paid in accordance with Rev. Proc. 2002-41. If the employer provides fuel or otherwise reimburses fuel expenses, up to $11 per hour (same as last year) is deemed substantiated if paid under Rev. Proc. 2002-41.
Refundable Credit for Coverage under a Qualified Health Plan
For tax years beginning in 2021, the limitation on tax imposed for excess advance credit payments under Code Sec. 36B where household income is less than 200% of the poverty line is $325 for unmarried individuals other than surviving spouses and heads of household and $650 for all other taxpayers (same as last year). Where household income is at least 200% of the poverty line but less than 300%, those amounts are $800 and $1,600 (same as last year). Where household income is at least 300% but less than 400%, those amounts are $1,350 and $2,700 (same as last year).
Requirement to Maintain Minimum Essential Coverage
For calendar year 2021, the applicable dollar amount used to determine the penalty for failure to maintain minimum essential coverage is $0 (same as last year).
Cafeteria Plans
For the tax years beginning in 2021, the dollar limitation under Code Sec. 125(i) on voluntary employee salary reductions for contributions to health flexible spending arrangements is $2,750 (same as last year).
Expatriation to Avoid Tax
For calendar year 2021, under Code Sec. 877A(g)(1)(A), unless an exception under Code Sec. 877A(g)(1)(B) applies, an individual is a covered expatriate if the individual's "average annual net income tax" for the five tax years ending before the expatriation date is more than $172,000 (up from $171,000 last year).
Tax Responsibilities of Expatriation
For tax years beginning in 2021, the amount that would be includible in the gross income of a covered expatriate by reason of Code Sec. 877A(a)(1) is reduced (but not below zero) by $744,000 (up from $737,000 last year).
Notice of Large Gifts Received from Foreign Persons
For tax years beginning in 2021, recipients of gifts from certain foreign persons must report these gifts if the aggregate value of gifts received in the tax year exceeds $16,815 (up from $16,649).
Persons Against Whom a Federal Tax Lien Is Not Valid
For calendar year 2021, a federal tax lien is not valid against (1) certain purchasers under Sec. 6323(b)(4) who purchased personal property in a casual sale for less than $1,640 (up from $1,620), or (2) a mechanic's lienor under Code Sec. 6323(b)(7) who repaired or improved certain residential property if the contract price with the owner is not more than $8,180 (up from $8,100).
Property Exempt from Levy
For calendar year 2021, the value of property exempt from levy under Code Sec. 6334(a)(2) (i.e., fuel, provisions, furniture, and other household personal effects, as well as arms for personal use, livestock, and poultry) cannot exceed $9,790 (up from $9,690). The value of property exempt from levy under Code Sec. 6334(a)(3) (books and tools necessary for the trade, business, or profession of the taxpayer) cannot exceed $4,890 (up from $4,850).
Interest on a Certain Portion of the Estate Tax Payable in Installments
For an estate of a decedent dying in calendar year 2021, the dollar amount used to determine the "2-percent portion" (for purposes of calculating interest under Code Sec. 6601(j)) of the estate tax is $1,590,000 (up from $1,570,000).
Revocation or Denial of Passport in Case of Certain Tax Delinquencies
For calendar year 2021, the amount of a serious delinquent tax debt for which a taxpayer's passport may be revoked or denied is $54,000 (up from $53,000).
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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