It seems that every year, there are myriad changes in the federal tax form. That is not going to be exception for the next go-round after this (now extended) deadline passes in May. For the taxes you do next year to cover your 2021 income, expect some specific changes that are a direct result of inflation, and that usually means that deduction income limits will be on the rise.
Yahoo Finance recently outlined the tax changes that are on the way for those who are going to be filing for 2021 income. Here’s a quick look at what to expect.
All the tax brackets are moving up
For instance, the single bracket for 2020 was at about $518,000. For 2021, it will increase to $523,000. It’s the same for married filing jointly, married final separately, and head of household. For married filing jointly, it’s $314,150, which is an increase of about $4,000 from the 2020 threshold.
The personal exemption is still dead
You used to be able to claim one dependent exemption on your taxes, but that was taken away as part of the sweeping tax cuts in 2018. It hasn’t changed for 2021, although as with the first change the standard deduction was increased substantially. Whether it evens out from what was provided before, though, depends on your individual situation.
Standard deductions rise for everyone
And, to that end, the standard deduction is also increasing thanks to expected inflation. For both single and married filing separately, the standard is $12,550, which is an increase from $12,400 in 2020. Head of household is a hire ratio: from $18,650 to $18,800. Married filing jointly takes a bigger leap to $25,100, up from $24,800.
Income limits rise for Roth IRAs
If you make too much money during the year, you aren’t able to make a contribution to Roth, which is an after-tax savings plan for retirement. Single filers can contribute to IRAs until they reach $140,000 (up from the $139,000 limit in 2020), while joint filers can contribute up to $208,000 (up from $206,000 last year).
All of these changes — and some other deductions and rules that are either staying in place or also increasing — can lead to some planning headaches, but also some more pleasant surprises as tax season rolls around again. The goal is to be aware and then adjust as needed when planning your financial future post-tax-time.
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