Every year, the IRS evaluates and makes certain changes to adjust for inflation. Below is a list of which changes you can expect for 2021 for taxes, retirement contributions, and social security.
Retirement Contributions
- 401(k) and IRA contribution limits
The basic salary deferral amount for 401(k) and similar workplace plans remains flat at $19,500; the $6,500 catch-up amount if you’re 50 or older also remains the same.
IRA contribution limits are flat. The amount you can contribute to an Individual Retirement Account stays the same for 2021: $6,000, with a $1,000 catch-up limit if you’re 50 or older.
- SEP IRA’s and SIMPLE 401(k)s
For the self-employed and small business owners, the amount they can save in a SEP IRA or a solo 401(k) goes up from $57,000 in 2020 to $58,000 in 2021. That’s based on the amount they can contribute as an employer, as a percentage of their salary; the compensation limit used in the savings calculation also goes up from $285,000 in 2020 to $290,000 in 2021.
- After Tax 401(k) contributions
If your employer allows aftertax contributions to your 401(k), you also get the advantage of the new $58,000 limit for 2021. It’s an overall cap, including your $19,500 (pretax or Roth in any combination) salary deferrals plus any employer contributions (but not catch-up contributions).
- SIMPLE IRA
The contribution limit for SIMPLE retirement accounts is unchanged at $13,500 for 2021. The SIMPLE catch-up limit is still $3,000.
- Defined Benefit Plans
The limitation on the annual benefit of a defined benefit plan is unchanged at $230,000 for 2021. These are powerful pension plans (an individual version of the kind that used to be more common in the corporate world before 401(k)s took over) for high-earning self-employed folks.
- Deductible IRA Phaseouts
You can earn a little more in 2021 and get to deduct your contributions to a traditional pretax IRA. Note: Even if you earn too much to get a deduction for contributing to an IRA, you can still contribute—it’s just nondeductible.
In 2021, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $66,000 and $76,000, up from $65,000 and $75,000 in 2020. For married
couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $105,000 to $125,000 for 2021, up from $104,000 to $124,000.
- ROTH IRA Phaseouts
The inflation adjustment helps Roth IRA savers too. In 2021, the AGI phase-out range for taxpayers making contributions to a Roth IRA is $198,000 to $208,000 for married couples filing jointly, up from $196,000 to $206,000 in 2020. For singles and heads of household, the income phase-out range is $125,000 to $140,000, up from $124,000 to $139,000 in 2020.
Tax Changes
The standard deduction for 2021 will be $25,100, an increase of $300, for married couples filing joint returns; $12,550, an increase of $150, for single taxpayers’ individual returns and married individuals filing separately; and $18,800, an increase of $150, for heads of households.
The additional standard deduction amount for an individual who is aged or blind will be $1,350; however, if the individual is unmarried and not a surviving spouse, the amount will be $1,700.
The standard deduction for an individual who can be claimed as a dependent on another taxpayer’s return cannot exceed the greater of (1) $1,100, or (2) $350 plus the individual’s earned income (but not more than the regular standard deduction, $12,550).
Social Security
Based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2019 through the third quarter of 2020, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 1.3 percent COLA for 2021.
The earnings limit on which an individual is taxed for social security has also been raised from $137,700 to $142,800 in 2021.
If you have any questions about these changes or would like to discuss how they could impact your personal plan, give us a call at 610-825-3540
