Each year, the IRS adjusts for inflation key tax limits and tax brackets, based on the cost of living adjustments (COLA).  Here are some important tax adjustments announced for the filing of 2021 tax returns, that become effective on January 1, 2021:

Income Tax Changes

  • Tax brackets for all filing statuses. The highest 37% individual tax bracket will now apply at $628,300 for married filing jointly status and $523,600 for unmarried taxpayers.
  • Standard deduction for all filing statuses. It will be $25,100 for married filing jointly status, $18,000 for head of household filers, and $12,550 for single individuals.
  • Section 179 expensing will be allowed up to $1,050,000, if the cost of Section 179 property placed in service during the year is under $2,620,000.

Retirement Plan Changes

  • Maximum amount deductible under a defined contribution plan has been increased from $57,000 to $58,000.
  • The annual compensation limit for plan contribution calculations has been increased from $285,000 to $290,000.
  • The minimum compensation amount for Simplified Employee Pension’s (SEP) has increased from $600 to $650.

The following retirement plan limits for 2021 remain unchanged from 2020:

  • Maximum amount of elective contributions for Section 401(k), 403(b), and 457(b) retirement plans remains at $19,500. Additional catch-up contributions for individuals age 50 or more in these plans remains at $6,500.
  • Maximum amount of IRA contributions remains at $6,500, as does $1,000 catch-up contributions.
  • The compensation limit for plan contributions for “key employees” in top-heavy plans remains at $185,000.
  • The salary definition of a “highly compensated employee” remains at $130,000.

For further details of these changes, please refer to IRS Notice 2020-79 for retirement plan changes and Rev Proc 2020-45 for all other changes.

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