Wolters Kluwer Tax & Accounting and Thomson Reuters Checkpoint have released their predictions for the expected annual inflation adjustments from the Internal Revenue Service for various tax-related items.
The information includes estimated ranges for the various 2021 tax brackets along with projections for different inflation-sensitive tax figures, such as the standard deduction. The projections are based on the relevant inflation data recently released by the US Department of Labor.
Since the late 1980s, the Tax Code has mandated that federal income tax brackets be adjusted for inflation annually. The inflation adjustments have been inserted into the Internal Revenue Code in recent years with increasing frequency. For instance, the Tax Code now requires more than 50 other inflation-driven computations to figure deduction, credit and exclusion amounts on top of the more than 30 separate computations needed to inflation-adjust the tax bracket schedules each year. Estimates for any of the inflation-adjusted tax figures for 2021 are also subject to any changes to the tax law that could be made by Congress over the course of the next year. That’s especially unpredictable during an election year.
Projections from Wolters Kluwer based on the Labor Department’s inflation figures for the 12-month period between Aug. 31, 2019, and Aug. 31, 2020 suggest most taxpayers will see a degree of inflation-driven “tax cut” savings, compared to 2020 tax filings. Thanks to the bracketing of income ranges, the inflation adjustments will offer an effective “tax cut” for many people by taxing more income at lower marginal tax rates. A single filer with taxable income of $50,000, for example, should owe $44 less next year due to the adjustments to the income tax rate brackets between 2020 and 2021. In another example, a married couple filing jointly with a total taxable income of $130,000 should pay $88 less income taxes in 2021 than they will on the same income for 2020 because of indexing of their tax bracket for 2021.
Earlier this month, Thomson Reuters Checkpoint released its estimates for the projected inflation adjustments for 2021, also based on the August 2020 Consumer Price Index summary released that day by the U.S. Bureau of Labor Statistics.
2021 Tax Rate Schedule Highlights
The basis standard deduction for 2021 will be:
For married filing joint returns and surviving spouses:
| If taxable income is: | The tax is: |
| Not over $19,900 | 10% of taxable income |
| Over $19,900 but not over $81,050 | $1,990 plus 12% of the excess over $19,900 |
| Over $81,050 but not over $172,750 | $9,328 plus 22% of the excess over $81,050 |
| Over $172,750 but not over $329,850 | $29,502 plus 24% of the excess over $172,750 |
| Over $329,850 but not over $418,850 | $67,206 plus 32% of the excess over $329,850 |
| Over $418,850 but not over $628,300 | $95,686 plus 35% of the excess over $418,850 |
| Over $628,300 | $168,993.50 plus 37% of the excess over $628,300 |
For single individuals (other than heads of household and surviving spouses):
| If taxable income is: | The tax is: |
| Not over $9,950 | 10% of taxable income |
| Over $9,950 but not over $40,525 | $995 plus 12% of the excess over $9,950 |
| Over $40,525 but not over $86,375 | $4,664 plus 22% of the excess over $40,525 |
| Over $86,375 but not over $164,925 | $14,751 plus 24% of the excess over $86,375 |
| Over $164,925 but not over $209,425 | $33,603 plus 32% of the excess over $164,925 |
| Over $209,425 but not over $523,600 | $47,843 plus 35% of the excess over $209,425 |
| Over $523,600 | $157,804.25 plus 37% of the excess over $523,600 |
Standard Deductions
| Filing Status | Standard Deduction |
| Joint return or surviving spouse | $25,100 (up from $24,800 for 2020) |
| Single (other than HoH or surviving spouse) | $12,550 (up from $12,400 for 2020) |
| Head of household | $18,800 (up from $18,650 for 2020) |
| Married filing separate returns | $12,550 (up from $12,400 for 2020) |
