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October 8, 2021 ▫️ Tax Planning

Tips to Prepare for Another Tricky Tax Year

It’s not too soon to start looking at next year’s tax season. With complex implications from the pandemic, including new credits, remote work and more, 2021 is shaping up to be another precarious tax year.

Several factors will make 2021 tax returns more complicated than average, including the third stimulus payment that started going out in March. Though the stimulus payments aren’t considered taxable income — if taxpayers include them as income, they will end up paying more in taxes and will ultimately need to request a refund.

The child tax credits will also be something that tens of millions of families will need to be aware of when filing, as it could impact their final return.

There are other complicating factors that will carry over from the 2020 tax year, including unemployment benefits and working remotely in different states.

And, if proposed changes in the tax code that passed a House committee are enacted into law, those that are wealthy — as defined by lawmakers — will likely see their taxes rise.

Key Provisions That Could Impact Your 2021 Tax Return Include:

  • Raising the top federal tax rate from 37% to 39.6%.

  • Raising the tax on dividends and the long-term capital gains tax rate for assets held over one year to 25% (up from 20%) for individuals earning more than $400,000 and for couples that earn over $450,000.

  • Putting new limits on qualified business income deduction (QBI) deduction for pass-through firms.

  • Placing new limits on those who have large retirement account balances.
The proposed changes have a way to go from becoming law but are winding their way through Congress.

Moreover, a sharply divided Senate seems likely to pare down the $3.5 trillion reconciliation bill, assuming legislators in the House compromise on new outlays. If new spending is reduced, smaller tax hikes could follow.

With Senate being split 50 Republicans, and essentially 50 Democrats (48 registered Democrats and 2 Independents that caucus with the Democrats), Vice President Kamala Harris can provide the tiebreaker vote to get to a simple majority and advance another substantial change to the tax code.

While the political path forward remains uncertain, it is better to plan for — but not attempt to predict — potential tax policy changes. Below is additional information on some of the proposed changes.

  • A higher rate on dividends and long-term capital gains.
    As proposed, if a capital gain is realized on or after September 14, 2021, individuals earning more than $400,000 and couples earning over $450,000 would pay a top rate of 25%. The same would hold true with dividends.

    With a few exceptions, it would be too late to incur a long-term capital gain at 2021’s lower rate.

    Taxpayers could consider deferring gains, as an unrealized capital gain would not be subject to taxes. Yet much would depends on someone’s individual circumstances.


  • New RMD requirements for individuals who have high income and large retirement accounts.
    If someone exceeds $400,000 and $450,000 in income for single and joint filers, respectively, AND retirement accounts total over $10 million — regardless of age — they could be subject to RMDs beginning in 2022.

    They would also be prohibited from making IRA contributions.

    However, the restriction on contributions wouldn’t apply to employer-sponsored plans such as 401(k)s, SEP IRAs, or SIMPLE IRAs.


  • Limits on qualified business income (QBI) deduction.
    If you are self-employed, the House proposal could limit deductions to $500,000 for joint returns and $400,000 for individual returns.
Lawmakers left on the cutting room floor taxing unrealized capital gains at death. Also, the step-up in basis for inherited assets is NOT in the current House proposal.

The bottom line is to be diligent about keeping track of all the information you will need for your 2021 tax returns.

Get your stimulus numbers, child tax credit information, and/or unemployment benefits together in one place to streamline your filing process. Also, start a list of things that might change your tax return — and tell your tax professional.

Remember, the proposed changes mentioned above MAY or MAY NOT be enacted into law.

And while taxes are essential when it comes to your overall financial wellbeing, there are other variables to consider. Also, a financial plan should drive your investment decisions, not tax laws.

As always, we are happy to entertain any questions and tailor recommendations to your situation.


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