Like most of us, you are probably more focused on your 2020 tax bill than how to manage your personal finances in 2021. However, as you get ready to file your annual tax filing, it’s a good idea to also think about changes that will impact your taxes for 2021.
Not all tax figures are adjusted for inflation and, even if they are, they may be unchanged or change only slightly each year when inflation is low. Additionally, some tax-related changes only occur with legislation. Here are six things you may want to consider as you plan for your 2021 taxes.
- How much can I contribute to an IRA for 2021?
If you are eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make a $1,000 “catch up” contribution. This did not change from 2020.
- How much can I contribute to my employer-sponsored retirement plan?
For 2021, you can contribute up to $19,500 to a 401(k) or 403(b) plan, and if you are 50 or older, you can make an additional $6,500 catch-up contribution if you’re age 50 or older. This also did not change from 2020.
- If I occasionally hire a babysitter or cleaning person, do I have to withhold and pay FICA tax on the amounts I pay them?
In 2021, the threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners and other domestic employees increases by $100 to $2,300 from $2,200 for 2020.
- How much do I have to earn in 2021 before I can stop paying Social Security on my salary?
The Social Security tax wage base is $142,800 for 2021, up from $137,700 for 2020. That means that you don’t owe Social Security tax on amounts earned above that, but you still must pay Medicare tax on all your income.
- Can I qualify to itemize deductions on my 2021 return if I didn’t in 2020?
It depends entirely on how many deductions you have. The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people because it increased the standard deduction and reduced or eliminated various deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800 for 2020). For single filers, the amount is $12,550 (up from $12,400) and, for heads of households, it’s $18,800 (up from $18,650). So, if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the standard deduction amount, there is no reason to itemize.
- How much can I give to one person without triggering a gift tax return in 2021?
The annual gift exclusion for 2021 is $15,000, the same as it is for 2020. This amount is only adjusted in $1,000 increments, so it typically increases only every few years.
Obviously, these are only some of the tax figures that may apply to you. For more information about your overall tax picture, or if you have questions, don’t hesitate to contact us. We can help you plan for 2020 and 2021 with the goal of reducing your tax burden.