Every year, the IRS adjusts more than 40 tax provisions for inflation. This is done to prevent “bracket creep,” when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, instead of any real income increase.
The IRS used the Consumer Price Index (CPI) to measure inflation before 2018. However, with the Tax Cuts and Jobs Act of 2017, the IRS now uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.
2021 Federal Income Tax Brackets and Rates
In 2021, all tax brackets’ income limits and all filers will be adjusted for inflation and will be as follows. The top marginal income tax rate of 37 percent will hit taxpayers with a taxable income of $523,600 and higher for single filers and $628,300 and higher for married couples filing jointly.
| 10% | Up to $9,950 | Up to $19,900 | Up to $14,200 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 | $14,201 to $54,200 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 | $54,201 to $86,350 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 | $86,351 to $164,900 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 | $164,901 to $209,400 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 | $209,401 to $523,600 |
| 37% | Over $523,600 | Over $628,300 | Over $523,600 |
2021 Estates and Trusts Income Tax Bracket
| If Taxable Income Is: | The Tax Is: |
| Not over $2,650 | 10% of the taxable income |
| $2,650-$9,550 | 24% |
| $9,550-$13,050 | 35% |
| the excess over $13,050 | 37% |
2021 Standard Deduction and Personal Exemption
The standard deduction for single filers will increase by $150 and $300 for married couples filing jointly.
The personal exemption for 2021 remains eliminated.
| Filing Status | Deduction Amount |
|---|---|
| Single | $12,550 |
| Married Filing Jointly | $25,100 |
| Head of Household | $18,800 |
2021 Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.
The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subject to the AMT, taxpayers can exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.
The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly (Table 3).
| Filing Status | Exemption Amount |
|---|---|
| Unmarried Individuals | $73,600 |
| Married Filing Jointly | $114,600 |
In 2021, the 28 percent AMT rate applies to excess AMTI of $199,900 for all taxpayers ($99,950 for married couples filing separate returns).
AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. In 2021, the exemption will start phasing out at $523,600 in AMTI for single filers and $1,047,200 for married taxpayers filing jointly.
| Filing Status | Threshold |
|---|---|
| Unmarried Individuals | $523,600 |
| Married Filing Jointly | $1,047,200 |
| Source: Internal Revenue Source |
2021 Earned Income Tax Credit
The maximum Earned Income Tax Credit in 2021 for single and joint filers is $543 if the filer has no children. The maximum credit is $3,618 for one child, $5,980 for two children, and $6,728 for three or more children. All these are relatively small increases from 2020.
| Filing Status | Income at Max Credit | No Children | One Child | Two Children | Three or More Children |
|---|---|---|---|---|---|
| Single or Head of Household | $7,100 | $10,640 | $14,950 | $14,950 | |
| Maximum Credit | $543 | $3,618 | $5,980 | $6,728 | |
| Phaseout Begins | $8,880 | $19,520 | $19,520 | $19,520 | |
| Phaseout Ends (Credit Equals Zero) | $15,980 | $42,158 | $47,915 | $51,464 | |
| Married Filing Jointly | Income at Max Credit | $7,100 | $10,640 | $14,950 | $14,950 |
| Maximum Credit | $543 | $3,618 | $5,980 | $6,728 | |
| Phaseout Begins | $14,820 | $25,470 | $25,470 | $25,470 | |
| Phaseout Ends (Credit Equals Zero) | $21,920 | $48,108 | $53,865 | $57,414 |
2021 Child Tax Credit
The child tax credit totals at $2,000 per qualifying child and is not adjusted for inflation. However, the Child Tax Credit’s refundable portion is adjusted for inflation but will remain at $1,400 for 2021.
2021 Capital Gains Tax Rates & Brackets (Long-Term Capital Gains)
Long-term capital gains are taxed using different brackets and rates than ordinary income.
| Income Tax Bracket | Single | For Married Individuals | For Heads of Households |
|---|---|---|---|
| 0% | $0 | $0 | $0 |
| 15% | $40,400 | $80,800 | $54,100 |
| 20% | $445,850 | $501,600 | $473,750 |
2021 Qualified Business Income Deduction (Sec. 199A)
The Tax Cuts and Jobs Act includes a 20 percent deduction for pass-through businesses against up to $164,900 of qualified business income for unmarried taxpayers and $329,800 for married taxpayers.
| Filing Status | Threshold |
|---|---|
| Unmarried Individuals | $164,900 |
| Married Filing Jointly | $329,800 |
2021 Annual Exclusion for Gifts
In 2021, the first $15,000 of gifts to any person are excluded from tax. The exclusion is increased to $159,000 for gifts to spouses who are not citizens of the United States.
2021 Federal Estate Tax Rate
In 2021 the estate and gift tax exemption is $11.7 million per individual, up from $11.58 million in 2020. Therefore an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, and a married couple could avoid federal estate taxes on $23.4 million.
Most Americans will not die with an estate worth $11.7 million or more. But for estates that do, the federal tax bill is pretty steep. Most of the estate’s value is taxed at a 40% rate.
As the table below shows, the first $1 million is taxed at lower rates – from 18% to 39%. That results in a total tax of $345,800 on the first $1 million, which is $54,200 less than the tax would be if the entire estate were taxed at the top rate. However, once you get past the first $1 million, everything else is taxed at the 40% rate.
| Rate | Taxable Amount (Value of Estate Exceeding Exemption) |
| 18% | $0 to $10,000 |
| 20% | $10,001 to $20,000 |
| 22% | $20,001 to $40,000 |
| 24% | $40,001 to $60,000 |
| 26% | $60,001 to $80,000 |
| 28% | $80,001 to $100,000 |
| 30% | $100,001 to $150,000 |
| 32% | $150,001 to $250,000 |
| 34% | $250,001 to $500,000 |
| 37% | $500,001 to $750,000 |
| 39% | $750,001 to $1 million |
| 40% | Over $1 million |
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