IRS Releases Inflation-Adjusted Tax Limits and Deductions for 2021

On Monday, the Internal Revenue Service officially released its list of inflation-adjusted tax limits and deductions for 2021. The list included a new estate and gift tax lifetime exemption for $11.7 million per person, increasing from the $11.58 million exemption in 2020. The adjusted exemption allows individuals to leave up to $11.7 million ($23.4 million for married couples) to their successors without paying estate or gift taxes.

With the passing of the Tax Cut and Jobs Act in 2017, President Donald Trump doubled the then-$5 million individual estate and gift tax exemption to $10 million, and it has since been adjusted for inflation each year. The estate and gift tax rate is currently at a flat 40%. Should former vice president Joe Biden be elected, he has proposed reinstating the estate tax exemption to $3.5 million and the gift tax exemption to $1 million (amounts last seen in 2009), with a maximum tax rate of 45%.

The IRS announced no changes would be made to the annual gift tax exclusion amount in 2021. The current annual gift tax exclusion amount is $15,000 per individual ($30,000 for married couples) and allows an individual to gift up to $15,000 per person, per year without any gift tax impact. Any gifts given in excess of the $15,000 annual exclusion will decrease the taxpayer’s $11.7 million lifetime exemption. Only after the $11.7 million lifetime exemption is exhausted will an individual pay estate or gift tax. To claim a deceased spouse’s unused lifetime exemption, a surviving spouse must elect portability by filing an estate tax return (Form 706).

Another notable inflation-adjusted amount for 2021 is the standard deduction. The new standard deduction will be $12,550 for single taxpayers (an increase from $12,400 in 2020) and $25,100 for couples who are married filing jointly (up from $24,800 in 2020). Unless you have total itemized deductions that surmount the standard deduction, the standard deduction will be used on your tax return. Thresholds for the qualified business income deduction have also seen adjustments. Beginning in 2021, the threshold amount for married couples filing jointly will be $329,800 ($164,900 for single taxpayers), up from $326,600 in 2020 ($163,300 for single taxpayers). The qualified business income deduction phases-out at these thresholds.

For questions about estate and gift tax planning or about other inflation-adjusted amounts for 2021, please, contact your dedicated HORNE Wealth Strategies team.