Welcome to Part 7 of the ol' blog's series on 2021 tax inflation adjustments.
We started with a look at next year's income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of next year's tax-related inflation updates.
Today's post looks at next year's changes to Alternative Minimum Tax (AMT) calculations, as well as Social Security and nanny tax changes.
Note: The 2021 figures in this post apply to that tax year's returns to be filed in 2022.
For comparison purposes, you'll also find 2020 amounts that apply to this year's taxes, due April 15, 2021.
The alternative minimum tax, usually referred to by its acronym AMT, was created in 1969 when lawmakers discovered that a few rich taxpayers — and we're really talking few, specifically 155 people who back then made more than $200,000 — avoided paying any tax.
The AMT was designed to ensure those wealthy taxpayers paid at least some tax at one of the parallel tax's two rates, either 26 percent or 28 percent. Plus, they had to do double the filing work, computing their taxes under both the regular and alternative tax methods.
It worked. In fact, it worked too well.
The AMT soon became a collection mechanism for a lot of decidedly not super-rich taxpayers, adding more money to the U.S. Treasury from that demographic.
The reason? The threshold at which the tax was triggered in 1960 was not indexed for inflation, meaning its parallel tax system and rates tended to trap each year a new group of filers whose income had increased each year.
In the eyes of these unintended payers of more tax, the AMT effectively was an ATM for the Internal Revenue Service.
Rewriting AMT's rich history: Congress finally fixed the inflation oversight in 2013, including the amount of income that's not subject to the AMT in its annual cost-of-living tax adjustments.
The AMT became even less burdensome in December 2017 with the enactment of the Tax Cuts and Jobs Act (TCJA). That tax reform measure increased the base AMT income exemption amount that's subject to inflation bumps, as well as hiked the threshold at which that exemption phases out.
Plus, the TCJA made deduction changes that mean fewer folks even have to think about the AMT. The parallel tax affects folks who itemize, requiring they add back some Schedule A claims before they figure their alternative tax amount. But since the TCJA greatly increased standard deduction amounts, fewer taxpayers are itemizing.
So now, the AMT is working for the most part as intended. The majority of taxpayers who will face it are those who truly are rich.
But don't get too comfortable. Taxes and tax situations are nothing if not fluid.
If you do somehow find yourself possibly looking at making both regular and AMT calculations, you'll want to check out the annual AMT inflation adjustments.
Here they are for 2021, with this tax year's amounts for comparison.
AMT's automatic inflation adjustment: You don't have to worry about the AMT at all if your income is in what is known as the exclusion range.
For 2021, the amount of earnings that is excepted from AMT start at:
- $73,600 for single and head of household taxpayers,
- $114,600 for married couples filing joint returns or surviving spouses, and
- $57,300 for married couples filing separately.
This 2020 tax year, those AMT exemption amounts start at:
- $72,900 for single and head of household taxpayers,
- $113,400 for married couples filing joint returns or surviving spouses, and
- $56,700 for married couples filing separately.
The minimum tax also applies estates. For 2021, the exemption amount for these legal and financial vehicles is $25,700. It is $25,400 for the 2020 tax year.
And the AMT also affects young people subject to the kiddie tax, discussed in Part 6 of this inflation series.
For the 2021 tax year, a child to whom the kiddie tax applies has an AMT exemption that's the child's annual amount of earned income (that's wage or salary money, not the investment in come to which the kiddie tax applies) plus $7.950. That "plus" amount for 2020 is the slightly less $7,900.
All these AMT exemptions for both years should save plenty of filers from the hassle of doing two separate tax computations.
Payroll taxable amount going up, too: As the AMT issue shows, earning more money does have some drawbacks. Still, I've never met anyone who's turned down a raise.
But if you do get a bump in pay (congrats!) next year, there's another annual adjustment amount you'll need to note.
I'm talking about the amount of wages that are subject to the federal payroll tax. Every worker is painfully aware of this tax, the Federal Insurance Contributions Act, or FICA as it often appears on pay stubs, amount that comes out of paychecks to help fund the Social Security and Medicare programs. For the Social Security portion, it's 6.2 percent of your pay.
This tax also is collected as the self-employment tax that must be calculated and paid by folks who are their own bosses.
Each year there's a limit on how much of your pay that is subject to the Social Security tax. This amount, known as the wage base, is determined by the Social Security Administration (SSA).
The SSA revealed that earnings limit back in mid-October, announcing that in 2021 the wage base limit would be $142,800. That's an increase from the 2020 limit of $137,700.
My earlier 2021 wage base post has more on the process — which is applied to just the Social Security portion of payroll taxes; there is no earnings cap for the Medicare tax — and just what the increase will mean to your paychecks next year.
Nanny tax changes, too: In addition to adjusting the wage base that's subject to the Social Security tax, the SSA also reviews the payment thresholds that trigger coverage for household workers.
The requirement that individuals who hire household staff is popularly known as the nanny tax. However, the tax applies doesn't just apply to a modern-day Mary Poppins. It covers all household, aka domestic, workers.
The folks who hire a nanny, housekeeper or others to help with the upkeep and running of their homes must let the Internal Revenue Service know about that staff. And when one of those workers earns more than a certain amount, that employer must pay their portion of the worker's Social Security tax. Remember, FICA taxes require employees and their bosses to equally split payment of these taxes.
For the 2021 tax year, the income threshold for domestic workers that triggers FICA coverage will increase to $2,300 for domestic employees. That's a slight bump up from the 2020 household worker income trigger of $2,200.
Yeah, I know. The AMT and nanny tax tend to be rich people's worries that I and most of the ol' blog's readers won't have to mess with in 2020 or 2021. But you never know.
Your (and my!) income situation to which these taxes and the FICA wage base apply could greatly improve in the future. When that happens, we'll be ready to deal with the associated taxes.
And if you want to check out other tax inflation changes for 2021, there's the directory mentioned in the box topping this post. It's at the end of Part 1 of this annual inflation series.