The IRS released Rev. Proc. 2020-45 and Notice 2020-79 to provide annual inflation adjustments for the 2021 tax year.
Rev. Proc. 2020-45 notably contains new tax rate schedules and adjustments for more than 60 tax provisions, including the following:
- The standard deduction is increased from $12,400 to $12,550 for single taxpayers and married individuals filing separately, from $18,650 to $18,800 for heads of households and from $24,800 to $25,100 for married couples filing jointly.
- The annual exclusion for gifts made during calendar year 2021 remains at $15,000.
- The basic exclusion for estates of decedents who die in 2021 is increased from $11,580,000 to $11,700,000.
- The alternative minimum tax exemption is $73,600 for single taxpayers, $57,300 for married individuals filing separately and $114,600 for surviving spouses or married couples filing jointly or surviving spouses. The exemption begins to phase out at $523,600 for single taxpayers and married individuals filing separately and at $1,047,200 for surviving spouses or married couples filing jointly.
- The amount for determining whether an employer is eligible for the Section 45R health insurance credit and for calculating the phaseout of the credit is increased from $27,600 to $27,800.
- The limit on voluntary employee salary reductions for contributions to health flexible spending arrangements remains at $2,750. The carryover amount, if permitted, is increased to $550.
- The monthly limit on the qualified transportation fringe exclusion for transportation in a commuter highway vehicle, any transit pass and qualified parking remains at $270.
- For a high deductible health plan (HDHP) that provides self-only coverage, the minimum annual deductible is increased from $2,350 to $2,400, the maximum annual deductible is increased from $3,550 to $3,600 and the maximum out-of-pocket expense amount is increased from $4,750 to $4,800. For an HDHP that provides family coverage, the minimum annual deductible is increased from $4,750 to $4,800, the maximum annual deductible is increased from $7,100 to $7,150 and the maximum out-of-pocket expense amount is increased from $8,650 to $8,750.
- The exemption amount for wages, salary or other income under Section 6334 remains at $4,300.
- The limit on total payments and reimbursements for a qualified small-employer health reimbursement arrangement is increased from $5,250 to $5,300 and from $10,600 to $10,700 for family coverage.
Rev. Proc. 2020-45 generally applies to tax years beginning in 2021, except for certain transactions or events occurring in calendar year 2021.
Notice 2020-79 provides the inflation-adjusted 2021 dollar limitations for benefits and contributions under qualified retirement plans. A summary of limitations for various plans is provided below:
- The employee contribution limit for 401(k) plans and other retirement accounts (including Roth 401(k) plans) remained unchanged at $19,500 in 2021. The limit for catch-up contributions for individuals 50 and older also remains unchanged at $6,500.
- The limit for total employee and employer contributions to defined contribution plans is increased from $57,000 to $58,000 in 2021.
- The limit on annual benefits from a defined benefit plan remained unchanged at $230,000 in 2021.
- The annual compensation limit for certain tax-favored retirement plans is increased from $285,000 to $290,000 in 2021.
- The deductible amount for contributions to an IRA remains unchanged at $6,000 in 2021. The limit for catch-up contributions for individuals 50 and older remains unchanged at $1,000. The start of the adjusted gross income (AGI) phase-out for deductibility of IRA contributions for individuals who participate in an employer retirement plan is increased from $65,000 to $66,000 for singles, and from $104,000 to $105,000 for joint filers. The start of the AGI phase-out for contributions to a Roth IRA is increased from $124,000 to $125,000 for singles, and from $196,000 to $198,000 for joint filers.
Notice 2020-79 is effective Jan. 1, 2021.
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
Washington DC, Washington DC
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