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As the IRS explains in Notice 2020-79, taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)
Here are the phase-out ranges for 2021:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $75,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $198,000 and $208,000, up from $196,000 and $206,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000. The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500.
- The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
IRA specialist Ed Slott of Ed Slott & Co., told ThinkAdvisor via email Monday that there were “really no big changes due to a largely negligible cost-of-living adjustment increase for 2021.”
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For instance, Slott explained, “the amounts that can be contributed for IRAs, Roth IRAs, SIMPLEs, 401(k)s and other employer plans have all remained unchanged from the 2020 limits.
SEP IRA contribution limits, meanwhile, “which are based on higher amounts, increased only $1,000 from $57,000 to $58,000 based on 20% of $290,000 of compensation, up from $285,000 in 2020,” Slott said.
“The SIMPLE catch-up limit stays unchanged at $13,500. Catch-up contributions do not apply to SEPs.”
The 2020 Roth IRA contribution eligibility phase-out limits based on income have increased slightly to $198,000 to $208,000 for married-joint and $125,000 to $140,000 for singles and heads of household.
Estate and Gift Tax Changes
In the estate and gift area, the annual exclusion gifts that can be made to anyone remained at $15,000, per person, per year, Slott said.
“But the estate and gift tax exemptions saw the biggest increases since these are much larger amounts to begin with, so even a small COLA adjustment can add thousands here,” he said. “The 2021 transfer tax exemption (estate, gift and generation-skipping tax) is $11,700,000 per person, up from $11,580,000 in 2020, an increase of $120,000.”
The standard deduction, he added, “is up slightly to $25,100 for married – joint, $12,550 for singles, and $18,800 for head of household.”
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