Rev. Proc. 2020-45: Inflation adjustments for 2021, individual taxpayers

Inflation adjustments for 2021, individual taxpayers

The IRS today released an advance version of Rev. Proc. 2020-45 providing the annual inflation adjustments for more than 60 tax provisions to be used by individual taxpayers on their 2021 returns (that is, the returns that are generally filed in 2022).

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Read Rev. Proc. 2020-45 [PDF 196 KB]

A related IRS release—IR-2020-245 (October 26, 2020)—notes that 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 December 31, 2019, the new additional tax is $435 or 100% of the amount of tax due, whichever is less (an increase from $330). The $435 additional tax will be adjusted for inflation.

Tax rates for individual taxpayers, adjusted for inflation

With the inflation adjustment, Rev. Proc. 2020-45 provides that for tax year 2021:

  • The top income tax rate will be 37% for individual single taxpayers with incomes greater than $523,600 and $628,300 for married couples filing jointly.
  • The other income tax rates will be:
    • 35% for incomes over $209,425 ($418,850 for married couples filing jointly)
    • 32% for incomes over $164,925 ($329,850 for married couples filing jointly)
    • 24% for incomes over $86,375 ($172,750 for married couples filing jointly)
    • 22% for incomes over $40,525 ($81,050 for married couples filing jointly)
    • 12% for incomes over $9,950 ($19,900 for married couples filing jointly)
  • The lowest rate will be 10% for single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly)

Standard deduction

The standard deduction amounts for 2021 will be increased, as follows:

  • For married couples filing jointly—$25,100 (an increase of $300 from the prior year)
  • For single taxpayers and married individuals filing separately—$12,550 (an increase of $150)
  • For heads of households—$18,800 (an increase of $150)

The personal exemption for tax year 2021 remains at $0 (the personal exemption was suspended for tax years 2018 through 2025 by the U.S. tax law enacted in 2017 (Pub. L. No. 115-97, or the law that is often referred to as the “Tax Cuts and Jobs Act” (TCJA)).

For 2021, there is no limitation on overall itemized deductions (referred to as the “Pease” limitation under prior law) because that limitation was also suspended by the TCJA for years 2018-2025. 

Other items

  • The alternative minimum tax (AMT) exemption amount is increased* for tax year 2021 to $73,600 and begins to phase out at $523,600—for married couples filing jointly, the AMT exemption amount will be $114,600, and the exemption begins to phase out at $1,047,200. 

*For 2020, the AMT exemption amount was $72,900 and began to phase out at $518,400 ($113,400 for married couples filing jointly and began to phase out at $1,036,800).

  • The qualified transportation fringe benefit for tax year 2021 will have a monthly limitation of $270 for qualified parking (unchanged from 2020).
  • The adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit for 2021 is $119,000 (up from $118,000 for 2020).
  • The foreign earned income exclusion for 2021 is $108,700 (up from $107,600 for 2020).
  • The maximum credit allowed for adoptions is the amount of qualified adoption expenses up to $14,440 (up from $14,300 for 2019).

Estate and gift exclusions

  • The basic exclusion amount for estates of decedents who die during 2021 is $11,700,000 (up from $11,580,000 for estates of decedents who died in 2020). 
  • The annual exclusion for gifts is $15,000 for calendar year 2021 (unchanged from 2020).

Medical and health-related amounts

  • The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements (FSA) is increased to $2,750 (unchanged from 2020).
  • Concerning medical savings accounts (MSAs), for tax year 2020, participants who have self-only coverage in a MSA, the plan must have an annual deductible that is not less than $2,400 (up $50 from  tax year 2020), but not more than $3,600 (up $50 from 2020). 
    • For self-only coverage, the maximum out-of-pocket expense amount is $4,800 (up $50 from 2020). 
    • Participants with family coverage, for 2020, the floor for the annual deductible is $4,800 (up $50 from 2020); however, the deductible cannot be more than $7,150 (up $50 from the limit for 2020). 
    • For family coverage, the out-of-pocket expense limit is $8,750 for tax year 2020 (up $100 from tax year 2020).

The IRS today also released a notice providing cost of living adjustments and dollar limitations for qualified retirement plans for tax year 2021. Read TaxNewsFlash

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