In December 2020, the $2.3 trillion Consolidated Appropriations Act 2021 became law and several provisions from the earlier Tax Cuts and Jobs Act were extended. Income tax brackets, eligibility for certain deductions and credits, and the standard deduction for income-tax payers all saw increases in 2021 as a result. Following is another important 2021 tax planning update.
Inflation Calculation Changes
Another significant change within the law relates to how the U.S. tax code calculates inflation. Traditionally, tax law has tied inflation calculation to the Consumer Price Index (CPI); this index measures the average change in prices paid by urban consumers on goods and services over time. Now, with recent tax reform, inflation is measured by Chained CPI.
According to TurboTax, the Chained CPI figure “measures inflation in a different, often slower way that accounts for consumers’ tendency to shy away from items that undergo a large price increase.” That means some taxpayers may get pushed into a higher marginal bracket than before, due to cost-of-living pay increases or other raises in income that outpace Chained CPI.
Q3 2021 Tax Planning Update
The third quarter is the time to assess your total estimated income, deductions, and credits for 2021. That way adjustments can be made before year-end to help reduce your overall tax bill. If you have questions or concerns, your Perspective advisor is available to help.