Another year is just beginning. While few people were sad to say goodbye to 2020, the new year means new changes to Internal Revenue Service (IRS) and Social Security Administration (SSA) guidelines.
The year 2020 was a year of tremendous upheaval. Unfortunately, that has created a fair amount of uncertainty as 2021 begins. Changes to retirement savings and contribution limits may impact your “take-home pay” for the new year.
More importantly, you will need to assess how these changes affect your withholding and how you budget your money for the year ahead. And, understanding 2021 changes can help you ensure you build up that all-important emergency fund and avoid living paycheck to paycheck if you do.
These are some of the changes that may affect your 2021 income.
- Defined Contribution Plans. Defined contribution plans remain steady this year when it comes to contribution limits at $19,500 for 401(k) plans and $13,500 for SIMPLE 401(k) plans. Additional catch-up contributions for those aged 50 and over also remained fixed at $6,500 for traditional and safe harbor 401(k) plans and $3,000 for SIMPLE 401(k) plans.
- Individual Retirement Accounts. Following the trend of 2020, IRA contribution limits remain steady for 2021 at $6,000 annually. However, investors aged 50 and over are allowed “catch-up” contributions, raising the limit to $7,000 annually.
- Defined Benefit Payment Plans. Like other retirement account limits, defined benefit limits remained the same for 2021 at $230,000.
- Social Security. Social Security benefits credits saw a $60 increase in 2021 from $1,410 in 2020 to $1,470 in 2021. The amount of money you can earn through employment without having a negative impact on your Social Security benefits has also increased from $18,240 in 2020 to $18,960 in 2021. Those who reach full retirement age in 2021 will experience increased maximums of $50,520 up from $48,600 in 2020.
- Social Security Taxes. For 2021, the Social Security tax rate is a total of 12.4 percent. That represents 6.2 percent for the employer and 6.2 percent for the employee, on the first $142,800 of employee income.
- Social Security Benefits. Social Security benefits recipients will enjoy a 1.3 percent Cost of Living Adjustment (COLA) for 2021. The increase is smaller than in recent years but remains good news for those who rely on their Social Security benefits when budgeting.
- Medicare Tax. Medicare tax remains unchanged over 2018, 2019, and 2020 rates at 1.45 percent on up to $200,000 in wages. People who earn more than $200,000 are required to pay an additional 0.9 percent.
- Standard Deductions. In 2021, standard deductions for married couples who file jointly increases to $25,100, representing a $300 increase over 2020. The rate increases by $150 to $12,550 for single payers or married couples filing individually for 2021. Heads of households have standard deductions of $18,800, which is up $150 from 2020.
- Flexible Spending Accounts. FSAs enables you to pay many of your eligible out-of-pocket health care expenses with tax-free funds. This year the FSA contribution limits remain the same as in 2020 at $2,750.
- Adoption Credit. There has been an increase in the maximum credit for child adoption. The tax credit amount was $14,300 in 2020. It has increased by $140 to $14,440 for 2021. This relief is in the form of a tax credit that helps to offset some of the costs involved in adopting a child.
Tax codes change from year to year, requiring you to revisit your budget, deductions, living expenses, saving plans, spending, and retirement investing for the coming year. The better you understand these changes and how they may impact your bottom line, the better positioned you are to make appropriate adjustments. This guide can help you with the paycheck planning process for 2021 to prepare now to avoid potential pitfalls.
© Fintactix, LLC 2021