28-Oct-20
2021 Inflation Adjustments to Taxes
Take-Away: In its Revenue Procedure 2020-45 the IRS published many estate planning inflation adjusted amounts scheduled to apply in 2021. This Procedure is 28 pages long and covers a variety of topics, taxes and thresholds, like the ‘Kiddie Tax,’ and also the more arcane, e.g. a tax is imposed on arrow shafts at $0.53 per shaft. What follows are some of those adjusted amounts of those that are involved in estate planning.
Basic Exclusion Amount: An individual can gift $11,700,000 in 2021. This amount is increased from the $11,580,000 used in 2020. This same exclusion can be used against federal estate taxes. The generation skipping transfer tax exemption has also increased to $11,700,000 per individual.
Annual Gift Tax Exclusion: This amount that can be given to a donee gift tax-free, like 2020, remains at $15,000 for 2021.
Marital Deduction for Non-Citizen Spouse: This amount that shelters a transfer to a noncitizen spouse is $159,000, which is an increase over the 2020 marital deduction amount of $157,000.
Valuation of Qualified Real Estate: If the decedent’s personal representative elect the special use valuation method [IRC 2032A) for qualified real property, the aggregate decrease in the value of the qualified real property as a result of the election cannot exceed $1,190,000.
Personal Exemptions: Like 2020, there are no personal exemptions to be claimed for income tax reporting purposes in 2021.
Limits on Itemized Income Tax Deductions: Like 2020, there is no limit on itemized income tax deductions.
Standard Deduction: The standard deduction amount that can be claimed on income tax returns is slightly increased for 2021.
- For married individuals filing jointly, the standard deduction will be $25,100 for 2021 (an increase of $300 over the 2020 standard deduction amount.)
- For individuals and married individuals who choose to file separately, the standard deduction will be $12,500 for 2021 (an increase of $150 over the 2020 standard deduction amount.)
- For those individuals who file as ‘head of household’ the standard deduction will be $18,000 for 2021 (and increase of $150 over the 2020 standard deduction amount.)
Top Income Tax Rate: The reported income where the top federal income tax rate of 37% will be encountered increases a bit.
- Married couples filing jointly will be at the marginal federal income tax rate of 37% when their reported income exceeds $628,300.
- Unmarried individuals will be at the marginal federal income tax rate of 37% when his or her reported income exceeds $523,600.
Top Income Tax Rate for Irrevocable Trusts: The top income tax bracket faced by an irrevocable trust (37%) will be reached when the trust’s accumulated income exceeds $13,051 (an increase from 2020’s accumulated (and undistributed) trust income of $12,950.