Every Jan. 1, there are new changes to the federal tax code that go into effect – many of which can impact your retirement savings plan. Here are some of those changes for 2021 that you’ll want to pay attention to:
- Workplace retirement plans: You can contribute up to $19,500 to your 401(k), 403(b), 457 and Thrift Savings Plan accounts – the same as last year. If you’re age 50 or older, you are allowed a $6,500 catch-up for a total contribution of up to $26,000.
- For self-employed or small-business owners: You can contribute up to $58,000 to a SEP-IRA or solo 401(k) plan.
- IRAs: You can contribute up to $6,000 to traditional and Roth IRAs – or up to $7,000 if you are 50 or older. The limit for employee contributions to SIMPLE retirement accounts is $13,500 (or up to $3,000 more if you are 50 or older).
- Federal gift tax: You can give up to $15,000 per person for tax year 2021 without incurring any gift tax (recipients never pay a gift tax). You can also give up to $11.7 million over the course of your lifetime – and if you’re married, your spouse can do the same.
- Federal estate tax: Upon your death, you can leave an unlimited amount of money to your spouse and up to $11.7 million to other heirs. If you’re married and you obtain certain estate planning documents, you and your spouse can leave up to $23.4 million to heirs, free of estate tax.
Both the gift and estate tax provisions, along with the personal tax cuts, are set to expire after Dec. 31, 2025, but the corporate tax relief was made permanent.
In the accompanying tables, the figures in the 2020 columns apply to the tax return you’ll file for tax year 2020. The figures in the 2021 columns pertain to the tax return you’ll file for 2021 (which you’ll do in 2022).
Schedule A long-term care premium deduction (NOTE: The long-term care deduction is not an outright federal tax deduction. The amount shown for your age group is added to your other medical expenses for the year, and total costs that exceed 7.5% of your Adjusted Gross Income can be deducted for 2020 and 2021. If you’re self-employed, you can deduct the premiums for your qualified long-term care policies if you made a net profit; deductible medical expenses are defined in IRS Publication 502.)
Gifts and Bequests
On top of the $15,000 annual exclusion, you can give up to $11.7 million in 2021 during your lifetime with no federal gift tax, and your spouse can do the same.
Hire a Professional
To ensure you don’t overlook any deductions and credits available to you, we recommend you retain the services of a professional tax preparer. We caution against reliance on friends or family members for two reasons: Only Certified Public Accountants, enrolled agents and attorneys are permitted to represent you before the IRS – meaning you’re on your own to explain your return if it was prepared by a friend. And well-meaning friends might not stand by their work, so if the IRS assesses a penalty, you’ll have to pay it. Professional tax advisors are often willing to pay any penalties resulting from their errors.
This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.