Tax Changes for 2021

Tax Planning text on Note pad

Every year, the U.S. tax system resets its limitations and allowable contributions due to inflation.  The most recent tax changes for tax year 2021 were recently announced.

Last year, single taxpayers covered by a workplace retirement plan could fully deduct their contributions to traditional IRA accounts if their income was at or below $65,000.  That income limit has moved up to $66,000.  After that point, the allowable deduction phases out until it disappears completely at the $76,000 income level.  For married filing jointly couples covered by a workplace retirement plan, the phase-out range shifted slightly.  It changed to $105,000-$125,000, up from $104,000-$124,000 income levels.  The limit on annual contributions remains at $6,000.  There is a $1,000 additional permitted “catch-up” contribution for people age 50 and over.

For an IRA contributor not covered by a workplace retirement plan, and is married to someone who is covered, the deduction is phased out.  The phase out applies if the couple’s income is between $198,000 and $208,000, up from $196,000 and $206,000.

Single taxpayers can contribute to a Roth IRA if their income is less than $125,000.  It phases out if income is between $125,000 and $140,000.  Married couples filing jointly can contribute to a Roth IRA if their income is less than $198,000.  The contribution phases out between $198,000 and $208,000.

The limits on contributions made by employees who participate in 401(k), 403(b) and most 457 plans is unchanged at $19,500.  There was no change in the $6,500 catch-up contribution limit for employees age 50 and over.  Participants in SIMPLE retirement accounts can still contribute a maximum of $13,500.

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