COLAs for 2021

The IRS has announced cost of living adjustments for more than 60 tax items for 2021 returns (Rev. Proc. 2020-45). Due to very low inflation, increases to various amounts and limits have been modest or nonexistent. All of the tax brackets have been adjusted, as well as the taxable income breakpoints for the favorable capital gains rate for long-term capital gains and qualified dividends. Here are some other key changes to note for individuals:

Standard deduction amounts. The standard deduction for joint filers rises to $25,100 (up from $24,800 in 2020). For single taxpayers and married individuals filing separately, the standard deduction in 2021 will be $12,550 (up from $12,400 in 2020), and for heads of households, the standard deduction will be $18,800 (up from $18,650 in 2020). The additional standard deduction amount for age or blindness increases to $1,350 for joint filers (up from $1,300 in 2020) and to $1,700 (up from $1,650 in 2020) for unmarried individuals who are not surviving spouses.

AMT. The alternative minimum tax exemption amount for 2021 for singles, including heads of households, will be $73,600 (up from $72,900 in 2020) and will begin to phase out at $523,600 (up from $518,400 in 2020). For joint filers, the exemption amount will be $114,600 (up from $113,400 in 2020) and will begin to phase out at $1,047,200 (up from $1,036,800 in 2020).

Medical FSAs. The salary reduction contribution limit for 2020 to a medical flexible spending account (FSA) remains at $2,750. The carryover limit is also unchanged at $550.

Transportation fringe benefits. The tax-free monthly amount for parking, transit passes, and vanpooling in 2021 will be $270, the same as in 2020.

Foreign earned income. The exclusion for foreign earned income from a job or self-employment abroad will be $108,700 in 2020 (up from $107,600 in 2020).

Estate and gift taxes. The annual gift tax exclusion remains unchanged at $15,000 per beneficiary. But the lifetime exemption amount for estates of decedents dying in 2021 will be $11,700,000 (up from $11,580,000 in 2020).