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RBTS, CPA

Jan 2023 Tax Letter

On October 18, 2022, the IRS announced the annual inflation adjustments for the 2023 tax year. As a result, many key tax provisions, including the income thresholds for the federal tax brackets, will increase by roughly 7% to account for the sky-high inflation Americans have seen throughout 2022. This larger-than-usual adjustment could mean many taxpayers may stay in a lower tax bracket; some may even see a smaller tax bill in 2024.

Personal Tax Changes That Take Effect in 2023

Child Tax Credit. Unless legislation is passed, some of the temporary changes that were made to the Child Tax Credit in 2021 will not apply in 2023. Some of the changes for 2023 include:

  • The credit amount is reduced to $2,000.
  • No portion of the credit is available in advance.

Other Dependents Credit. The Credit for Other Dependents is worth up to $500. The IRS defines a dependent as a qualifying child (under age 19 or under 24 if a full-time student, or any age if permanently and totally disabled) or a qualifying relative.

Earned Income Tax Credit (EITC). The total credit amount depends on income and the number of children — people without kids can still qualify. For tax year 2022, the earned income credit ranges from $560 to a maximum of $6,935. In 2023, the credit will increase to a maximum of $7,430 for qualifying taxpayers with three or more children.

Child and Dependent Care Assistance. It’s meant to cover a percentage of day care and similar costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Currently, the numbers are the same as for 2022 tax year. Generally, it's up to 35% of $3,000 of expenses for one dependent, for a maximum amount of $1,050, or $6,000 for two or more dependents, for a maximum amount of $2,100.

Electric Vehicle Credit. If you buy a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) in 2023 or after, you may qualify for a clean vehicle tax credit up to $7,500. The Inflation Reduction Act of 2022 changed the rules for this credit for vehicles purchased from 2023 to 2032.

The credit is available to individuals and their businesses. To qualify, you must:

  • Buy it for your own use, not for resale.
  • Use it primarily in the U.S.
In addition, your modified adjusted gross income (MAGI) may not exceed:
  • $300,000 for married couples filing jointly;
  • $225,000 for heads of households;
  • $150,000 for all other filers.
You can use your MAGI from the year you take delivery of the vehicle or the year before, whichever is less. If your MAGI is below the threshold in one of the two years, you can claim the credit.

The credit is nonrefundable, so you can't get back more on the credit than you owe in taxes. You can't apply any excess credit to future tax years.

Energy Efficient Home Improvement Credit through December 31, 2022 is a $500 lifetime credit. It is increased for years after 2022, with an annual credit of generally up to $1,200. Beginning January 1, 2023, the amount of the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures, including (1) qualified energy efficiency improvements installed during the year, (2) residential energy property expenditures during the year, and (3) home energy audits during the year. The credit is allowed for qualifying property placed in service on or after January 1, 2023, and before January 1, 2033.

Federal Solar Tax Credit reduces your income tax in exchange for going solar. Homeowners and business owners who have purchased and installed solar photovoltaic (PV) energy generation systems in 2022 or will do so before 2033 are eligible to claim a federal tax credit equal to 30% of the overall cost of the system’s components, installation and associated fees during the year of installation.

Required Minimum Distribution (RMD). If lawmakers don't pass any changes to the current law, the RMD age of 72 would continue to apply in 2023. Failure to take the RMD can cause a penalty of 50% on the amount not distributed. ROTH IRAs do not require withdrawals until after the death of the owner.

The maximum contribution to a 401(k) in 2023 is $22,500, or $30,000 for people over 50. ROTH and traditional IRA contributions are up to $6,500 and up to $7,500 for people over 50. Eligibility, and whether your contribution is deductible, will depend on your income level and whether or not you have a retirement plan at work. There is no age limit on making regular contributions to traditional or ROTH IRAs.

The adjusted gross income (AGI) limit to qualify for the the Retirement Savings Contributions Savers Credit in 2023 is $36,500 for single filers and married individuals filing separately, $54,750 for heads of household, and $73,000 for married couples filing jointly. Also, an eligible individual should be 18 or older, not a full-time student, not claimed as a dependent on another person's tax return, and make contributions to a retirement plan or IRA. The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly).

2023 annual inflation-adjusted limit on Health Savings Account (HSA) contribution for self-only coverage will be $3,850, up from $3,650 in 2022. The HSA contribution limit for family coverage will be $7,750, up from $7,300. The adjustments represent approximately a 5.5 percent increase over 2022. People who are age 55 or older can contribute an additional catch-up contribution of $1,000 per year.

The Annual Exclusion for Gifts, which limits how much taxpayers can give an individual without filing a gift tax return on certain gifts, will increase to $17,000 per person in 2023, up $1,000 from 2022.

Student Loan Interest Deduction. In 2023, you can claim the full $2,500 student loan interest deduction as long as you, as a single taxpayer, have MAGI of $75,000 or less. The income threshold goes to $155,000 next year for married filing jointly taxpayers with college debt.

American Opportunity Tax Credit amount is up to $2,500 per student.

Lifetime Learning Credit is $2,000, based on $10,000 in qualifying expenses.

Standard Deductions for 2023 tax year:

Filing Status Standard Deduction for 2023 Tax Year Change from 2022
Single $13,850 +$900
Married filing jointly $27,700 +$1,800
Head of household $20,800 +$1,400
Married filing separately $13,850 +$900

DATA SOURCE: IRS.

People who are at least 65 years old or blind can claim an additional standard deduction of $1,500 in 2023 ($1,850 if claiming the single or head of household filing status). If both spouses are 65 or older and blind, the additional deduction amount is doubled.

If you can be claimed as a dependent on another person's tax return, your 2023 standard deduction is limited to the greater of $1,250 or your earned income plus $400 (the total can't be more than the basic standard deduction for your filing status).

Long-term capital gains rates are 0%, 15% or 20%, depending on taxable income and filing status. In 2023, the 0% rate applies for individual taxpayers with taxable income up to $44,625 on single returns, $59,750 for head-of-household, and $89,250 for joint returns. The 20% rate for 2023 starts at $492,301 for singles, $523,051 for heads of household and $553,851 for couples filing jointly. The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

The 3.8% surtax on net investment income stays the same for 2023. It kicks in for single and head of household people with modified AGI over $200,000, for joint filers and qualified widowers with dependent child with modified AGI over $250,000, and for married filing separately tax payers with modified AGI over $125,000.

For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly). The other rates are:

Tax Rate Single Head of Household Married Filing Jointly Married Filing Separately
10% $0 to $11,000 $0 to $15,700 $0 to $22,000 $0 to $11,000
12% $11,000 to $44,725 $15,700 to $59,850 $22,000 to $89,450 $11,000 to $44,725
22% $44,725 to $95,375 $59,850 to $95,350 $89,450 to $190,750 $44,725 to $95,375
24% $95,375 to $182,100 $95,350 to $182,100 $190,750 to $364,200 $95,375 to $182,100
32% $182,100 to $231,250 $182,100 to $231,250 $364,200 to $462,500 $182,100 to $231,250
35% $231,250 to $578,125 $231,250 to $578,100 $462,500 to $693,750 $231,250 to $346,875
37% $578,125 or more $578,100 or more $693,750 or more $346,875 or more

DATA SOURCE: IRS.

2023 Standard Mileage Rate

Per the IRS, beginning on January 1, 2023, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 65.5 cents per mile driven for business use, up 3 cents from the mid-year increase setting the rate for the second half of 2022.
  • 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, consistent with the increased mid-year rate set for the second half of 2022.
  • 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2022.

These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.

The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for moving expenses, unless they are members of the Armed Forces on active duty moving under orders to a permanent change of station.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Taxpayers can use the standard mileage rate but generally must opt to use it in the first year the car is available for business use. Then, in later years, they can choose either the standard mileage rate or actual expenses. Leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.

Krassy Popova, CPA, MBA, EA, CAA
RBTS, CPA

Dec 2022 Tax Letter

Although you can't officially file your federal tax returns until the last week in January, now's a great time to get organized for tax season. Many of the pandemic tax benefits from the past few years, like the expanded child tax credit, temporary expansions to the child and dependent care credit and federal stimulus payments, ended at the end of 2021, which could mean your refund will be a little smaller this year or you may find yourself owing tax this year.

Personal Tax Changes That Took Effect in 2022

Child Tax Credit. It has dropped back down to its pre-pandemic amount, $2,000 per child or dependent, and is now only available for children under 17 years of age. The credit, which was fully refundable last year, is now only partially refundable up to $1,500 to some lower-income parents, and advance payments are no longer in effect.

Other Dependents Credit. The Credit for Other Dependents is worth up to $500. The IRS defines a dependent as a qualifying child (under age 19 or under 24 if a full-time student, or any age if permanently and totally disabled) or a qualifying relative.

Earned Income Tax Credit (EITC). In 2022, the maximum earned income credit for people without children is up to $560; up to $3,733 for people with one qualifying child; up to $6,164 for people with two qualifying children; and up to $6,935 for people with 3 or more qualifying children, still, depending on their adjusted gross income.

Child and Dependent Care Assistance. It’s meant to cover a percentage of day care and similar costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Generally, it's up to 35% of $3,000 of expenses for one dependent, for a maximum amount of $1,050, or $6,000 for two or more dependents, for a maximum amount of $2,100.

Electric Vehicle Credit. Through the end of 2022, the qualified plug-in electric drive motor vehicle credit is still available but it's not refundable, meaning buyers need to have a federal tax liability to get full or partial benefits. It applies to qualifying new electric and plug-in hybrid passenger vehicles and light trucks. The credit is equal to $2,500 plus $417 for every kilowatt hour of battery capacity in excess of four kilowatt hours—up to $7,500 in total credits. Vehicles purchased after August 16, 2022, only qualify for the credit if they underwent final assembly in North America. Furthermore, manufacturers that have sold more than 200,000 qualifying vehicles, including Toyota and Tesla, won't be eligible for this tax credit until 2023.

Residential Energy Property Credit through 2019 was worth up to 30% of qualifying expenditures. The credit’s rate was reduced to 26% through 2022 and 22% in 2023, expiring after 2023. The IRA restored the 30% credit for the 2022 tax year and made battery storage technology placed in service in 2023 or later eligible.

Federal Solar Tax Credit is 30% of the cost of a solar PV system paid for by the taxpayer. The installation of the system must be complete during the tax year. It will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. The tax credit expires starting in 2035 unless Congress renews it. There is no maximum amount that can be claimed.

Required Minimum Distribution (RMD) must be made for 2022. A taxpayer who is at least 72 years old by the end of 2022 is required to take a RMD. Failure to take the RMD can cause a penalty of 50% on the amount not distributed. ROTH IRAs do not require withdrawals until after the death of the owner.

The maximum contribution to a 401(k) in 2022 is $20,500, or $27,000 for people over 50. ROTH and traditional IRA contributions are up to $6,000 and up to $7,000 for people over 50. Eligibility, and whether your contribution is deductible, will depend on your income level and whether or not you have a retirement plan at work. There is no age limit on making regular contributions to traditional or ROTH IRAs. Coronavirus-related withdrawals from IRAs, pension plan, or 401(k) plan during 2020 can be re-contributed back into a qualified retirement plan at any time during the following three-year period to eliminate otherwise reportable taxable income.

The AGI limit to qualify for the the Retirement Savings Contributions Savers Credit in 2022 is $34,000 for single filers and married individuals filing separately, $51,000 for heads of household, and $68,000 for married couples filing jointly. Also, an eligible individual should be 18 or older, not a full-time student, not claimed as a dependent on another person's tax return, and make contributions to a retirement plan or IRA.

2022 Health Savings Account (HSA) contribution limits for an individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,400) are up to $3,650. The maximum out-of-pocket has been increased to $7,050. An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $2,800) can contribute up to $7,300. The maximum out-of-pocket is $14,100. People who are age 55 or older can contribute an additional catch-up contribution of $1,000 per year.

The annual Gift Tax Exclusion amount for 2022 is up to $16,000 per recipient with no limitation of the number of recipients.

Above-the-Line Charitable Deductions. People who took the standard deduction on their 2020 or 2021 tax return could also claim a tax deduction of up to $300 for cash donations to charity. The $300 deduction wasn't extended past 2021. For 2022 and beyond, the only way to write off gifts to charity is to itemize.

The Educator Expense Deduction allows eligible educators to deduct up to $300 worth of qualified expenses from their income for 2022, which includes books and classroom supplies, technology and computer software used in the classroom, and professional development courses related to teaching that were not reimbursed by school or by another source.

Student Loan Interest Deduction is $2,500 for 2022, based on income eligibility. For single, head of household or a qualifying widow(er) taxpayers the loan interest phase-out starts at $70,000 modified AGI and ends at $85,000. For married couples with income of $145,000 phase-out begins and ends at $175,000.

American Opportunity Tax Credit amount is up to $2,500 per student. The full credit may be claimed by people with modified adjusted gross income (MAGI) of up to $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly.

Lifetime Learning Credit is $2,000, based on $10,000 in qualifying expenses. It phases out for single taxpayers with modified adjusted gross income (MAGI) between $80,000 and $90,000 and between $160,000 and $180,000 of MAGI for joint filers.

Standard Deductions for 2022 tax year:

Filing Status Standard Deduction for 2022 Tax Year Change from 2021
Single $12,950 +$400
Married filing jointly $25,900 +$800
Head of household $19,400 +$600
Married filing separately $12,950 +$400

DATA SOURCE: IRS.

People who are at least 65 years old or blind can claim an additional standard deduction of $1,400 in 2022 ($1,750 if claiming the single or head of household filing status). If both spouses are 65 or older and blind, the additional deduction amount is doubled.

If you can be claimed as a dependent on another person's tax return, your 2022 standard deduction is limited to the greater of $1,150 or your earned income plus $400 (the total can't be more than the basic standard deduction for your filing status).

Long-term capital gains rates are 0%, 15% or 20%, depending on taxable income and filing status. In 2022, the 0% rate applies for individual taxpayers with taxable income up to $41,675 on single returns, $55,800 for head-of-household, and $83,350 for joint returns. The 20% rate for 2022 starts at $459,751 for singles, $488,501 for heads of household and $517,201 for couples filing jointly. The 15% rate is for filers with taxable incomes between the 0% and 20% break points. The 3.8% surtax on net investment income stays the same for 2022. It kicks in for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.

For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly). The other rates are:

Tax Rate on Income Single Head of Household Married Filing Jointly Married Filing Separately
10% $0 to $10,275 $0 to $14,650 $0 to $20,550 $0 to $10,275
12% $10,275 to $41,775 $14,650 to $55,900 $20,550 to $83,550 $10,275 to $41,775
22% $41,775 to $89,075 $55,900 to $89,050 $83,550 to $178,150 $41,775 to $89,075
24% $89,075 to 170,050 $89,050 to 170,050 $178,150 to $340,100 $89,075 to 170,050
32% $170,050 to $215,950 $170,050 to $215,950 $340,100 to $431,900 $170,050 to $215,950
35% $215,950 to $539,900 $215,950 to $539,900 $431,900 to $647,850 $215,950 to $323,925
37% $539,900 or more $539,900 or more $647,850 or more $323,925 or more

DATA SOURCE: IRS.

2022 Standard Mileage Rate

The standard IRS mileage rates are:

  • 58.5 cents per mile for business miles driven from January 1, 2022 to June 30, 2022, and
  • 62.5 cents per mile for business miles driven from July 1, 2022 to December 31, 2022.
  • 14 cents per mile for charity miles driven from January 1, 2022 to December 31, 2022.
  • 18 cents per mile for moving or medical purposes from January 1, 2022 to June 30, 2022, and
  • 22 cents per mile for business miles driven from July 1, 2022 to December 31, 2022

The IRS reminds taxpayers they have the option of calculating the actual cost of using their vehicle, rather than the standard mileage rate.

Under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses.

Krassy Popova, CPA, MBA, EA, CAA
RBTS, CPA

Jan 2021 Tax Letter

In this issue:


2021 Tax Deadlines for Individuals and Small Businesses

Tax year 2020 4th quarter estimated tax payments: January 15, 2021

Partnerships/LLCs tax returns (Form 1065): March 15, 2021

S Corps tax returns (Form 1120S): March 15, 2021

C Corps tax returns (Form 1120): April 15, 2021

Individuals and Sole Proprietors tax returns (Form 1040): April 15, 2021

2021 1st Quarter Estimated Tax Payments: April 15, 2021

2021 2nd Quarter Estimated Tax Payments: June 15, 2021

Partnerships/LLCs with filed extensions (Form 1065): September 15, 2021

S Corps with filed extensions (Form 1020S): September 15, 2021

2021 3rd Quarter Estimated Tax Payments: September 15, 2021

S Corps with filed extensions (Form 1020): October 15, 2021

Individuals and Sole proprietors with filed extensions (Form 1040): October 15, 2021

2021 4th Quarter Estimated Tax Payments: Mid-January 2022


2021 Standard Mileage Rate

The optional standard mileage rates for business use of a vehicle will decrease once again in 2021 after increasing significantly in 2019. For business use of a car, van, pickup truck, or panel truck, the rate for 2021 will be 56 cents per mile after decreasing to 57.5 cents per mile in 2020, down from 58 cents per mile in 2019.

Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

Because the law known as the Tax Cuts and Jobs Act (TCJA) suspended the miscellaneous itemized deduction for unreimbursed employee business expenses from 2018 to 2025, the standard mileage rate cannot be used to claim a deduction for those expenses during that period.

However, self-employed taxpayers can deduct automobile expenses if they qualify as ordinary and necessary business expenses. And an exception to the disallowance of a deduction for unreimbursed employee business expenses applies to members of a reserve component of the U.S. armed forces, state or local government officials paid on a fee basis, and certain performing artists. They are permitted to deduct mileage expenses on line 11 of Schedule 1, Additional Income and Adjustments to Income, of Form 1040, U.S. Individual Income Tax Return, and may continue to use the 56 cents-per-mile business standard mileage rate.

The standard mileage rate also can be used as the maximum amount an employer can reimburse an employee for operating an automobile for business purposes without substantiating the actual expense incurred.

Driving for medical care or for certain limited moving expense purposes for members of the armed forces may be deducted at 16 cents per mile, which is 1 cent lower than for 2020.

The TCJA repealed the moving expense deduction for individual taxpayers from 2018 to 2025, except for U.S. armed forces members on active duty who move pursuant to a military order and incident to a permanent change of station.

The rate for service to a charitable organization is unchanged, set by statute at 14 cents per mile.

The portion of the business standard mileage rate that is treated as depreciation will be 26 cents per mile for 2021, 1 cent less than 2020.

To compute the allowance under a fixed-and-variable-rate (FAVR) plan, the maximum standard automobile cost is $51,100 for 2021 for all automobiles (including trucks and vans), $700 more than in 2020.

The FAVR amounts were recalculated in 2018 after the TCJA retroactively amended the bonus depreciation rules. Under a FAVR plan, a standard amount is deemed substantiated for an employer's reimbursement to employees for expenses they incur in driving their vehicle in performing services as an employee for the employer. Those rules were also updated in IRS regulations.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

 

Everyone's hoping that 2021 will be a lot different from how 2020 was. But when it comes to your 2021 income taxes, the IRS isn't planning on a huge transformation like we saw back in 2018.

Even without major tax reform, however, you still have to go through the minor changes that happen to your taxes every single year. Below, you'll find the information you need on some of the most important ones.

Personal Tax Changes That Take Effect in 2021

Standard deduction for 2021
Annual inflation adjustments brought a modest rise in standard deductions for 2021:

Filing Status Standard Deduction for 2021 Tax Year Change from 2020
Single $12,550 +$150
Married filing jointly $25,100 +$300
Head of household $18,800 +$150
Married filing separately $12,550 +$150

DATA SOURCE: IRS.

In addition to these base standard deductions, those who are 65 or older or are blind get an extra add-on. For those who are married, the added amount is $1,350, while singles get to add $1,700. Both of those figures are $50 higher in 2021 than they were in 2020. For joint filers, each spouse has an opportunity to get these added amounts.

The standard deduction amount for those minor children who have to file income tax returns remained the same in 2021 as it was in 2020. Children always get at least $1,100 as a standard deduction, and if they get more than $750 in earned income from work, then the standard deduction is their total earned income plus $350 more up to the regular standard deduction in the table above.

Popular tax credits in 2021

Tax credits reduce your tax bill dollar-for-dollar, making them more valuable than deductions.

The earned income tax credit gives reductions in taxes to workers with low- or mid-level incomes. The credit amount varies by family size and income, with maximums of $6,728 for those with three or more children (up $68 from 2020), $5,980 for those with two children (up $60), $3,618 for those with one child (up $34), or $543 for those with no children (up $5). The income limits below indicate which taxpayers are eligible for at least some of the earned income credit. The top credit amount phases out gradually over a large portion of the income range.

Filing Status Income Limit if No Children Income Limit if 1 Child Income Limit if 2 Children Income Limit if 3+ Children
Single, Head of Household, or Widowed $15,980 $42,158 $47,915 $51,464
Married Filing Jointly $21,920 $48,108 $53,865 $57,414

DATA SOURCE: IRS.

A special thing about the earned income tax credit is that even if you don't owe anything in taxes, you can still get the credit amount back from the IRS in the form of a refund.

The saver's tax credit pays as much as $1,000 per person to encourage retirement contributions. Depending on your income, you can get a credit for 10%, 20%, or 50% of up to $2,000 in contributions to an IRA, 401(k), or similar retirement account. The following income limitations apply, and above the top amount, no credit is available.

Credit Percentage Single or Married Separate Head of Household Married Joint
50% of contribution $0 to $19,750 $0 to $29,625 $0 to $39,500
20% of contribution $19,751 to $21,500 $29,626 to $32,250 $39,501 to $43,000
10% of contribution $21,501 to $33,000 $32,251 to $49,500 $43,001 to $66,000

DATA SOURCE: IRS.

The Lifetime Learning tax credit offers additional educational tax breaks even beyond traditional college. A 20% credit on up to $10,000 in eligible expenses every year is available to taxpayers making less than $59,000 in 2021 if they're single or $119,000 if they're filing jointly, with reduced credits available up to $69,000 in income for singles and $139,000 for joint filers. This credit is available for graduate school, vocational training, and certain other nontraditional educational expenses.

Retirement tax planning for 2021

IRA contribution limits will be the same in 2021 as they were in 2020: $6,000 for those younger than 50 and $7,000 for those 50 or older. Similarly, 401(k) contribution limits will remain $19,500 for those under 50 and $26,000 for those 50 or older. Traditional IRAs always allow you to make contributions regardless of income, but you can't always deduct those contributions. Roth IRAs can prohibit you from making contributions if your income is too high.

The applicable limits for 2021 are below. Below the phase-out range, you're entitled to a full contribution or deduction. Above it, no contribution or deduction is allowed. With it, you can only deduct or contribute a portion of the $6,000 or $7,000 maximum.

Filing Status Roth IRA Phase-Out Range Traditional IRA Phase-Out Range if Worker Has Employer-Sponsored Retirement Account Traditional IRA Phase-Out Range if Spouse Has Employer-Sponsored Retirement Account
Single $125,000 to $140,000 $66,000 to $76,000 N/A
Married filing jointly $198,000 to $208,000 $105,000 to $125,000 $198,000 to $208,000
Married filing separately $0 to $10,000 $0 to $10,000 $0 to $10,000

DATA SOURCE: IRS.

No such income limits apply to 401(k) contributions.

529 plans and Coverdell ESAs let you set money aside for educational purposes, with tax-free treatment as long as you use the money on qualifying expenses. There are no income limits on 529 plans, but income limits of $95,000 to $110,000 for single filers and $190,000 to $220,000 for joint filers apply to reduce or eliminate the ability to make the maximum Coverdell contribution of $2,000 per year.

For healthcare expenses, those with high-deductible health insurance coverage can use health savings accounts to set money aside for future care costs. Contribution amounts of up to $3,600 for those with self-only policies or $7,200 for family policies apply in 2021, with minimum annual deductibles of $1,400 or $2,800 respectively required to qualify for high-deductible health plan status. Catch-up contributions of $1,000 are available if you're 55 or older, but a qualifying plan must have maximum out-of-pocket expenses of $7,000 for self-only policies or $14,000 for family coverage.

Estate taxes in 2021

In 2021, this amount rises to $11.7 million, up from $11.58 million in 2020.

More people focus on the annual gift tax exclusion amount. That lets people give up to $15,000 per year to as many different recipients as they want in 2021. That amount is unchanged from 2020's level.

Tax brackets for 2021

If you file as a single or married filing separately (MFS), the following brackets apply:

Bracket for Singles Tax is this amount plus this percentage Of the amount over
$0 to $9,950 $0 plus 10% $0
$9,950 to $40,525 $995 plus 12% $9,950
$40,525 to $86,375 $4,664 plus 22% $40,525
$86,375 to $164,925 $14,751 plus 24% $86,375
$164,925 to $209,425 $33,603 plus 32% $164,925
$209,425 to $523,600 ($314,150 for MFS) $47,843 plus 35% $209,425
Above $523,600 ($314,150 for MFS) $157,804.25 plus 37% $523,600

DATA SOURCE: IRS.

To qualify as a head of household, the requirements include that you be unmarried and provide both housing and financial support for a child, parent, or other relative who lives with you for greater than half of the year. The financial support you provide must generally be more than half of all support the child or other relative received during the year.

Bracket for Head of Household Tax is this amount plus this percentage Of the amount over
$0 to $14,200 $0 plus 10% $0
$14,200 to $54,200 $1,420 plus 12% $14,200
$54,200 to $86,350 $6,220 plus 22% $54,200
$86,350 to $164,900 $13,293 plus 24% $86,350
$164,900 to $209,400 $32,145 plus 32% $164,900
$209,400 to $523,600 $46,385 plus 35% $209,400
Above $523,600 $156,355 plus 37% $523,600

DATA SOURCE: IRS.

Most married taxpayers file jointly. If you were married but your spouse passed away recently, then you're also allowed to use these brackets as a surviving spouse.

Bracket for married filing jointly Tax is this amount plus this percentage Of the amount over
$0 to $19,900 $0 plus 10% $0
$19,900 to $81,050 $1,990 plus 12% $19,900
$81,050 to $172,750 $9,328 plus 22% $81,050
$172,750 to $329,850 $29,502 plus 24% $172,750
$329,850 to $418,850 $67,206 plus 32% $329,850
$418,850 to $628,300 $95,686 plus 35% $418,850
Above $628,300 $168,993.50 plus 37% $628,300

DATA SOURCE: IRS.

2021 tax rate on long-term capital gains and qualified dividends

Tax Rate on Income Single Married Filing Jointly Head of Household Married Filing Separately
0% Up to $40,400 Up to $80,800 Up to $54,100 Up to $40,400
15% $40,400 to $445,850 $80,800 to $501,600 $54,100 to $473,750 $40,400 to $250,800
20% Above $445,850 Above $501,600 Above $473,750 Above $250,800

DATA SOURCE: IRS.

Krassy Popova, CPA, MBA, EA, CAA
RBTS, CPA

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