IRS releases new tax rates for 2021

The IRS on Monday released annual inflation adjustments for 2021, including tax tables, tax rate schedules, and accost-of-living adjustments, and other tax changes.

Each year, the internal revenue service updates its marginal income tax rates. The individual income tax brackets are updated to reflect inflation. There are seven tax brackets: 10%, 12%, 22$, 24%, 32%, 35%, and 37%. The brackets are marginal which means that different portions of individual income will be taxed at different rates.

“The Consolidated Appropriation Act for 2020 increased the amount of the minimum addition tax for failure to file a tax return within 60 days of the due date. Beginning with returns due after Dec. 31, 2019, the new additional tax is $435 or 100 percent of the amount of tax due, whichever is less, an increase from $330. The $435 additional tax will be adjusted for inflation,” the IRS said in its official release for the updated tax rates.

The updated rates will go into effect by 2021 and will reflect on the returns individuals file for that year in 2022. Here’s a breakdown of the updated tax rates:

·        Standard deduction: for married couples filing jointly rises to $25,100, up $300 from the previous year; single taxpayers and married individuals filing separately rises to $12,550, up $150; heads of households will be $18,800, up $150;

·        Standard deduction for Personal exemption for tax year 2021 remains at zero as the previous year.

·        Marginal rates: top tax rate remains at 37% for individual single tax payers with income greater than $523,600 and $628,300 for married couples filing jointly. Other rates are: 35%, for incomes over $209,425 ($418,850 for married couples filing jointly); 32% for incomes greater than $164,925 ($329,850 for married couples filing jointly); 24% for incomes above $86,375 ($172,750 for married couples filing jointly); 22% for incomes above $40,525 ($81,050 for married couples filing jointly); 12% for incomes above $9,950 ($19,900 for married couples filing jointly); 10% for single individuals with incomes of $9,950 or less ($19,900 or less for married couples filing jointly).

·        No limitation on itemized deductions for 2021, as in 2020, 2019 and 2018. (Limitation was eliminated under the Tax Cuts and Job Acts).

·        Alternative Minimum Tax exemption amount for 2021 is $73,600 and it starts to phase out at $523,600 for single individuals. For married couples filing jointly the minimum exemption is $114,600 and begins to phase out at $1,047,200).

·        Minimum Earned Income Credit amount for tax year 2021 is $6,728 for qualifying taxpayers with three or more qualifying children, up from $6,660 in the prior year.

·        Monthly limitation for qualified transportation fringe benefit for 2021 remains $270. The same applies to the monthly limitation for qualified parking.

·        Dollar limitation for employee salary reductions for contributions to health flexible spending arrangements for the tax year 2021 remains $2,750.

·        Foreign earned income exclusion for tax year 2021 is $108,700, up from $107,600 in the prior year.

For further details about the 2021 tax updates, visit: the IRS website