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The 2020 tax year saw several changes brought on by coronavirus-related legislation and others that were set to happen anyway. Now, as we enter our third year of the Covid-19 pandemic, the 2021 tax season is underway. And, like 2020, there are a lot of new tax changes to keep track of—from stimulus check payments and expanded child tax credits to allowable deductions and credits. Here’s a rundown of issues to keep in mind as you prepare to file your 2021 tax return.
Key Takeaways
- The deadline for filing your 2021 tax return is April 18, 2022 (April 19 in Massachusetts and Maine), due to Patriot’s Day).
- The standard deduction for married filing jointly taxpayers is $25,100 for the 2021 tax year—a $300 increase over 2020. For single filers (and married filing separately) it’s $12,550, up $150.
- There are still seven marginal tax rates, with higher income brackets in 2021 to account for inflation.
- You can deduct up to $300 ($600 if you’re married filing jointly) in charitable contributions “above the line”—even if you take the standard deduction.
- Estates of people who die during 2021 have a basic exemption amount of $11.7 million, up from $11.58 million from the previous year.
Note to Hurricane Ida Victims
Some residents and business owners in Louisiana and parts of Mississippi, New York, and New Jersey received extensions on their deadlines for filings and payments to the IRS due to Hurricane Ida. Due to the tornado in December 2021, taxpayers in parts of Kentucky were also granted extensions. Consult IRS disaster relief announcements to determine your eligibility.
Tax Brackets and Rates
Like 2020, there are seven marginal tax rates at the federal level: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income thresholds increase for both 2021 and 2022. Here’s a rundown of tax brackets for 2021:
| 2021 Tax Brackets and Rates | |||
|---|---|---|---|
| 2021 Tax Rate | Single Filers | Married Filing Jointly | Heads of Household |
| 10% | Up to $9,950 | Up to $19,900 | Up to $14,200 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 | $14,201 to $54,200 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 | $54,201 to $86,350 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 | $86,351 to $164,900 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 | $164,901 to $209,400 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 | $209,401 to $523,600 |
| 37% | $523,601 or more | $628,301 or more | $523,601 or more |
Here’s what to expect for 2022:
| 2022 Tax Brackets and Rates | |||
|---|---|---|---|
| 2022 Tax Rate | Single Filers | Married Filing Jointly | Heads of Household |
| 10% | $0 to $10,275 | $0 to $20,550 | $0 to $14,650 |
| 12% | $10,275 to $41,775 | $20,550 to $83,550 | $14,650 to $55,900 |
| 22% | $41,775 to $89,075 | $83,550 to $178,150 | $55,900 to $89,050 |
| 24% | $89,075 to $170,050 | $178,150 to $340,100 | $89,050 to $170,050 |
| 32% | $170,050 to $215,950 | $340,100 to $431,900 | $170,050 to $215,950 |
| 35% | $215,950 to $539,900 | $431,900 to $647,850 | $215,950 to $539,900 |
| 37% | $539,900 or more | $647,850 or more | $539,900 or more |
Standard Deductions
The standard deduction is the portion of your income that’s not subject to income tax. You can take the standard deduction unless you itemize deductions on Form 1040 Schedule A. The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the standard deduction for 2018; these changes expire after 2025. Here are the standard deduction amounts by filing status for the 2021 and 2022 tax years:
| Standard Deductions for 2021 and 2022 | ||
|---|---|---|
| Filing Status | 2021 Standard Deduction | 2022 Standard Deduction |
| Single | $12,550 | $12,950 |
| Married Filing Separately | $12,550 | $12,950 |
| Heads of Household | $18,800 | $19,400 |
| Married Filing Jointly | $25,100 | $25,900 |
| Surviving Spouses | $25,100 | $25,900 |
Itemized Deductions
For most filers, it’s easier to take the standard deduction. However, if the value of your itemized deductions is greater than your standard deduction, it makes sense to itemize. Not much has changed for 2021, but here’s a reminder:
- State and local taxes (SALT): The combined deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
- Mortgage interest deduction: You can deduct your mortgage interest on up to $750,000 of debt (the limit is $1 million if you bought the home before Dec. 16, 2017).
- Charitable donations: The cash donation limit of 100% of AGI remains in place for 2021. Note that this limit is not automatic; you must elect it on your Form 1040.
- Medical expenses: You can deduct medical expenses that exceed 7.5% of your AGI.
- Miscellaneous deductions. You can no longer deduct miscellaneous itemized deductions—unless you claim a deduction related to unreimbursed employee expenses.
Capital Gains Tax Rates
The tax treatment of long-term capital gains changed with the TCJA. Before 2018, the capital gains tax brackets were closely aligned with income tax brackets. However, the TJCA created unique capital gains tax brackets. Here they are for 2021 and 2022:
| Long-Term Capital Gains Tax Rates for 2021 | |||
|---|---|---|---|
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
| Single | Up to $40,400 | $40,401 to $445,850 | Over $445,850 |
| Head of Household | Up to $54,100 | $54,101 to $473,750 | Over $473,750 |
| Married Filing Jointly | Up to $80,800 | $80,801 to $501,600 | Over $501,600 |
| Married Filing Separately | Up to $40,400 | $40,401 to $250,800 | Over $250,800 |
| Long-Term Capital Gains Tax Rates for 2022 | |||
|---|---|---|---|
| Filing Status | 0% Rate | 15% Rate | 20% Rates |
| Single | Up to $41,675 | $41,676 to $459,750 | Over $459,750 |
| Head of Household | Up to $55,800 | $55,801 to $488,500 | Over $488,500 |
| Married Filing Jointly | Up to $83,350 | $83,351 to $517,200 | Over $517,200 |
| Married Filing Separately | Up to $41,675 | $41,676 to $258,600 | Over $258,600 |
Child Tax Credit
The American Rescue Plan of 2021 increased the Child Tax Credit from $2,000 to:
- $3,600 for children ages five and under at the end of 2021
- $3,000 for children ages six through 17 at the end of 2021
On July 15, 2021, the IRS started sending out a portion of the credit through advance monthly payments of $300 per month for each child under six and $250 for each child aged six to 17. The advance payments continued on a monthly basis through Dec. 2021.
The Child Tax Credit is gradually reduced to $2,000 per child if your modified AGI exceeds:
- $150,000 if married filing jointly or filing as a qualified widow or widower
- $112,500 if filing as head of household
- $75,000 if you are a single filer or are married filing separately
The credit can be reduced below $2,000 per child if your modified AGI exceeds $400,000 if you’re married filing jointly—or $200,000 for all other filing statuses.
Advance Child Tax Credit payments are not income and won’t be reported as income on your 2021 tax return. However, the payments are based on the IRS’s estimates of your 2021 Child Tax Credit. If you received more than you’re entitled to, you might have to repay the excess amount on your 2021 tax return during the 2022 tax filing season.
Alternative Minimum Tax
The alternative minimum tax (AMT) limits certain tax breaks for higher-income taxpayers to ensure they pay at least a minimum amount of income tax. According to the Tax Foundation, “The federal AMT was created in 1963, after Congress discovered that 155 high-income taxpayers were eligible to claim so many deductions that they ended up with no federal income tax liability at all.”
High-income taxpayers have to calculate their tax bill twice—once using the standard income tax system and again under the AMT—and pay the higher of the two. The AMT is levied at two rates: 26% and 28%. Here are the AMT exemptions and phase-outs for 2021 and 2022:
| AMT Exemptions for 2021 and 2022 | ||||
|---|---|---|---|---|
| 2021 Exemption | 2021 Phaseout | 2022 Exemption | 2022 Phaseout | |
| Single | $73,600 | $523,600 | $75,900 | $539,900 |
| Heads of Household | $73,600 | $523,600 | $75,900 | $539,900 |
| Married Filing Jointly | $114,600 | $1,047,200 | $118,100 | $1,079,800 |
Five states—California, Colorado, Connecticut, Iowa, and Minnesota—have an alternative minimum tax (AMT) in their individual income tax codes.
Charitable Contributions
The CARES Act allows a $300 ($600 if you’re married filing jointly) “above-the-line” deduction for cash contributions to qualifying charities, even if you take the standard deduction when you file in 2021. Additionally, the law lifts the 60% of adjusted gross income (AGI) limitation on cash contributions for those who itemize: You can deduct donations up to 100% of your AGI in 2021. Note: Donations to donor-advised funds and supporting organizations do not qualify.
The 100% of AGI limit on cash contributions is not automatic. You must elect to take the new limit; otherwise, the usual (lower) limit will apply. You can make your election on Form 1040 or Form 1040-SR.
401(k) Plan Contribution Limits
The contribution limit for employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s Thrift Savings Plan (TSP) is $19,500 for 2021 (unchanged from 2020). However, due to a higher-than-normal inflation rate, the limit bumps up to $20,500 for 2022.
The “catch-up” contribution limit for employees age 50 or older stays the same at $6,500 for 2021 and 2022. The catch-up limit applies to the following plans:
For SIMPLE retirement accounts, the contribution limit is $13,500 for 2021 (also unchanged from 2020), increasing to $14,000 for 2022. A $3,000 catch-up limit applies to participants age 50 and up for both years.
IRA Contribution Limits
The annual contribution limit for traditional IRAs and Roth IRAs remains unchanged at $6,000 for 2021 and 2022. There’s an additional catch-up contribution of $1,000 for those over 50.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. During the year, if either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced or phased out. If neither the taxpayer nor their spouse is covered by an employer-sponsored retirement plan, the phase-outs of the deduction do not apply.
Phase-out ranges for 2021 (and 2022) are as follows:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000 in 2021 ($68,000 to $78,000 in 2022).
- For married filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000 in 2021 ($109,000 to $129,000 in 2022).
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $198,000 and $208,000 in 2021 ($204,000 to $214,000 in 2022).
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000 in both 2021 and 2022.
Roth IRA contributions are not deductible. In addition, there are income limitations on the amount you can contribute to a Roth IRA. The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household in 2021 ($129,000 to $144,000 in 2022). For married couples filing jointly, the income phase-out range is $198,000 to $208,000 in 2021 ($204,000 to $214,000 in 2022).
The Saver’s Credit
People with low-to-moderate incomes may qualify for the saver’s credit, a dollar-for-dollar reduction of the taxes you owe. The credit is available to people who contribute to an IRA, 401(k), or any other qualified retirement account—provided their AGI falls within specific parameters.
For 2021, the income limit for the saver’s credit (also referred to as the retirement savings contributions credit) is $66,000 for married couples filing jointly ($68,000 in 2022), $49,500 for heads of household ($51,000 in 2022), and $33,000 for singles and married individuals filing separately ($34,000 in 2022).
Required Minimum Distributions (RMDs)
Required minimum distributions (RMDs) for IRAs and defined contribution plans, such as profit sharing and 401(k) plans, were waived for 2020. This included your first RMD if you reached age 70½ during 2019.
However, RMDs are back for 2021 (and beyond). You must start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, and retirement plan accounts by April 1, following the year you turn 72.
Roth IRAs have no required minimum distributions during the account owner’s lifetime. If you don’t need the money, you can leave it alone and let the account grow tax-free for your heirs.
Earned Income Tax Credit
The earned income tax credit (EITC) is a refundable tax credit that helps lower-income taxpayers reduce the amount of tax owed on a dollar-for-dollar basis. As a refundable tax credit, taxpayers may be eligible for a refund even if they have no tax liability for the year. Here are the EITC AGI limits and maximum credit amounts for 2021 and 2022:
| EITC for 2021 | |||
|---|---|---|---|
| Dependents | Single or Head of Household | Married Filing Jointly | Maximum EITC |
| 0 | $21,430 | $27,380 | $1,502 |
| 1 | $42,158 | $48,108 | $3,618 |
| 2 | $47,915 | $53,865 | $5,980 |
| 3+ | $51,464 | $57,414 | $6,728 |
The income limits and maximum credits don’t change much for 2022—unless you don’t have children, in which case you’ll have a harder time qualifying (and get a smaller credit if you do):
| EITC for 2022 | |||
|---|---|---|---|
| Dependents | Single or Head of Household | Married Filing Jointly | Maximum EITC |
| 0 | $16,480 | $22,610 | $560 |
| 1 | $43,492 | $49,622 | $3,733 |
| 2 | $49,399 | $55,529 | $6,164 |
| 3 | $53,057 | $59,187 | $6,935 |
Due to the Covid-19 pandemic, Congress passed a “lookback rule” that allows taxpayers to use either their 2019 or 2021 income to calculate their EITC in 2021—whichever results in a larger credit.
HSA Contribution Limits
The dollar limit for employee salary reductions for contributions to a health flexible spending account (FSA) is $2,750 for 2021 and $2,850 for 2022.
For tax year 2021, people who have self-only coverage in a medical savings account (MSA) must have an annual deductible that’s between $2,400 and $3,600 ($2,450 to $3,700 in 2022). The maximum out-of-pocket expense for self-only coverage is $4,800 ($4,950 in 2022).
The annual deductible for participants with family coverage must be between $4,800 and $7,150 for 2021 ($4,950 to $7,400 for 2022). For family coverage, the out-of-pocket expense limit is $8,750 for the tax year 2021 ($9,050 in 2022).
Estate Tax Exemption and Annual Gift Exclusion
Estates of people who die during 2021 have a basic estate tax exemption amount of $11.7 million (up from $11.58 million in 2020). For 2022, the exemption rises to $12.06 million.
The annual exclusion for gifts is $15,000 for the calendar years 2020 and 2021, increasing to $16,000 for 2022.
The Bottom Line
The inflation adjustments of the IRS intend to keep federal taxes in line with inflation, so it pays to know the latest figures. It’s also helpful to keep tabs on recent tax law changes—even those unrelated to inflation. Knowing the latest information can help you plan for the 2021 tax year and beyond.
What Is the Deadline for Filing My 2021 Tax Return?
What Is the Standard Deduction for 2021?
Taxpayers can choose the standard deduction or itemize their deductions on Form 1040 Schedule A. The standard deductions for 2021 are:
- $12,550 for single and married filing separately filers
- $18,800 for heads of household
- $25,100 for married filing jointly taxpayers and surviving spouses
What Is the Estate Tax Exemption for 2021?
Most estates are too small to trigger the federal estate tax, which applies only if the assets of the decedent’s estate are worth $11.7 million or more for 2021. The exemption increases to $12.06 in 2022. Note that about a dozen states also levy an estate tax.
Should I Hire a Tax Preparer or Use Tax Software?
A slight majority of people in the U.S. pay a tax preparer to file their returns. Still, tax software (e.g., TurboTax) has made it easier for people to prepare and file their own returns. The decision can come down to cost: Tax software is generally cheaper than hiring a tax pro. However, you should also consider the complexity of your return (go the pro route if you own a business, had a major life event, or want to itemize), your tax proficiency, and your schedule. In general, you’ll save money but not time if you prepare your own return. If you go with a tax pro, you’ll generally save time but not money. Of course, an experienced tax preparer may save you more money than you spend on their services, so that should be taken into account, too.