As we move into 2021 there are several tax changes to be aware of. There are some new tax rules taking effect for the 2021 tax year. Some rules were enacted in 2020 in the wake of the pandemic that will impact your 2020 tax filing in 2021. And the Biden administration is expected to propose changes to the tax code as well.
Tax Changes for 2021
There are not a huge number of tax changes for the 2021 tax year, but here are two to be aware of.
Estate and Gift Tax Exemption
The personal exemption for lifetime federal estate and gift taxes has been increased to $11.7 million per person. This is up from $11.58 million for 2020. The annual gift tax exclusion remains at $15,000 per person for 2021 – the Biden administration may seek to reduce this level. Under the Tax Cuts and Jobs Act which passed in late 2017, this is scheduled to revert back to $5 million in 2026.
This presents a planning opportunity for those with large estates who wish to transfer assets to their heirs before the exemption limits are reduced.
Standard Deduction
There are slight increases in the standard deduction for 2021. For those filing married and joint the increase is to $25,100 from $24,800 in 2020. For single filers the new level is $12,555 up from $12,400 in 2020.
While these increases are not large, it does create a higher hurdle for those who want to itemize deductions. Whether in 2021 or a subsequent year, there are benefits to bunching deductions that might normally be spread over several years into a single year to get the maximum tax benefit from itemizing deductions.
Tax Changes for the 2020 Filing Season
The 2020 tax season is kicking off a bit later than normal, the IRS has indicated they will begin accepting and processing tax returns on Friday February 12, 2021. The IRS is also encouraging taxpayers to file electronically this year if possible.
For anyone who received a stimulus payment either under the CARES Act or the December stimulus bill, these payments are not considered to be taxable income for 2020.
Potential Changes That Could Impact Your Taxes
Under President Biden, there are a number of potential tax law changes that could impact a number of taxpayers.
One potential change would entail increasing income taxes for those who earn $400,000 or more. His plan would raise the top marginal tax rate to 39.6% from the current 37%. This would reinstate the top rate that was in place prior to the enactment of the Tax Cut & Jobs Act.
His proposal would eliminate the preferential rates for long-term capital gains and qualified dividends for those with incomes of $1 million or more. Capital gains would be taxed as ordinary income for these taxpayers, effectively 39.6% versus the current top rate of 23.8%.
Additionally, the Biden plan would eliminate the step-up in basis on inherited assets, effectively raising eliminating the break heirs receive from paying capital gains taxes if they sell inherited assets.
The Biden tax proposal would also limit the benefit of itemized deductions to 28% for higher income taxpayers. His proposal would also eliminate the $10,000 cap on the ability to deduct state and local taxes on federal returns.
Another Biden proposal would impose the 12.4% Social Security tax on those with incomes of $400,000 or more. For 2021 incomes over $142,800 do not incur this tax. This ceiling generally increases annually. This proposal would essentially create a “donut hole” between this annual cap and those earning $400,000 or more.
Summary
While there are some tax changes for 2021 both for the 2021 tax year and for the 2020 tax filing season, the big changes are likely to come from the Biden tax plan if the proposal passes through Congress. Be sure to consult with your tax professional to ensure your tax planning incorporates new rules which may impact your situation.
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Disclosure
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.