New Filing Schedule, Tax Limits for 2021
Last Friday, the Internal Revenue Service announced a delay in the beginning of the 2021 tax season to February 12, about two weeks later than its usual start, in order to allow the agency to complete preparations related to the tax changes that went into effect December 27, with the signing of legislation authorizing the most recent round of pandemic relief checks. “The February 12 start date for individual tax return filers allows the IRS time to do additional programming and testing of IRS systems,” the IRS said in its statement, further explaining, “If filing season were opened without the correct programming in place, then there could be a delay in issuing refunds to taxpayers.” On or after February 12, taxpayers may begin filing returns for the tax year ending December 31, 2020.
In addition to this latest change, the IRS previously announced an increase in the amount of income taxpayers may report while still fully deducting contributions to traditional IRAs. Every year, due to inflation, the US tax system resets its limitations and allowable contributions and benefits. The most recent changes—affecting tax year 2021—were announced October 26, 2020.
Last year, single taxpayers could fully deduct their contributions to traditional IRA accounts if their income was at or below $65,000; now that income limit has moved up to $66,000, at which point the allowable deduction begins to phase out until it disappears completely at the $76,000 income level. For couples who are married and filing jointly, the phase-out range also increased slightly, to $105,000-$125,000, up from $104,000-$124,000 income levels. Contributions to traditional IRAs are tax-deductible—subject to the income limits—and distributions after age 59 ½ are typically taxed as ordinary income. This contrasts with Roth IRAs, for which contributions are not deductible, but distributions are not taxed as ordinary income.
The limit on annual contributions remains at $6,000, with a $1,000 additional “catch-up” contribution permitted for people age 50 and over. Limits on contributions by employees who participate in 401(k), 403(b), and most 457 plans were left unchanged, at $19,500, and there was no change in the $6,500 catch-up contribution limit for employees age 50 and over. Participants in savings incentive match plans for employees (SIMPLE retirement accounts) can still contribute $13,500.
Limitations on the annual benefit payable to a single individual under a defined benefit (pension) plan remains unchanged at $230,000, and the limitation for defined contribution plans—typically, 401(k) and 403(b) plans—will go up in 2021 from $57,000 to $58,000.
If you have questions about the deductibility of your IRA contributions or about contribution limits to your IRA, 401(k) plan, or 403(b) plan, our team of professional, fiduciary advisors can provide the answers you need. We would love to hear from you. We also assist and advise our clients on tax-efficient strategies for taking distributions from their retirement accounts, allowing them to minimize the income taxes owed and, in some cases, extend the useful life of other investments. To learn more, click here to read our recent article, “Reaping the Harvest: Smart Tax Strategies for Your Retirement Income.”