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Proposed Tax Law | What We Know and What We Don't

As extension season comes to a close for the 2020 tax year, we should now be looking ahead to what taxes are going to look like for 2021 and beyond. While some changes have already been put in place, we are all hearing a lot about the proposed changes that are still on the table. We now need to look at what we know, and how it will change our taxes for 2021, as well as what we don’t know and how those items could influence our 2021 and future tax filing decisions.

Tax Bracket Changes

While under the current law the tax rates have not changed but the tax brackets have.

Currently the tax brackets for 2021 look like this:

 Rate

Taxable Income (Single)

Taxable Income (Married Filing Joint)

Taxable Income (Head of Household)

10%

Up to $9,950

Up to $19,900

Up to $14,200

12%

Up to $40,525

Up to $81,050

Up to $54,200

22%

Up to $86,375

Up to $172,750

Up to $86,350

24%

Up to $164,925

Up to $329,850

Up to $164,900

32%

Up to $209,425

Up to $418,850

Up to $209,400

35%

Up to $523,600

Up to $628,300

Up to $523,600

37%

Over $523,600

Over $628,300

Over $523,600


Under the proposal for future years, there is a potential to raise the top tax bracket from 37% to 39.6% while also decreasing the taxable income component. While no official bracket has been released, it is believed that the single individual top bracket would go into effect on taxable income of more than $452,700, married filing joint taxable income over $509,300, and head of household taxable income over $481,000.

Required Minimum Distributions are Back

During 2020 individuals were allowed to skip their RMD’s. This was a one-year deal and RMD’s are back for 2021. Anyone who is 72 years of age or older by the end of the year will be required to take an RMD. If you opted not to take your RMD for 2020 it is important to note that starting back up with distributions in 2021 is going to increase overall income and may require adjustments for withholding to limit any penalties or interest when filing your return.

Within the proposed changes, if an individual’s combined traditional IRA, Roth IRA and defined contribution retirement account balances exceed $10 million at the end of a taxable year, a minimum distribution would be required during the following year, regardless of age. This would only be for taxpayers with taxable income over $400,000.

Rollovers to Roth IRAs

2021 may be the year you want to consider rolling funds to a Roth IRA. For some individuals, it may be the last year they are capable of using this tax strategy. Under the current law, contributions to a Roth IRA can be limited based on your income. In the past, to avoid these limitations, individuals could make a non-deductible contribution to a Traditional IRA and then roll those funds into a Roth IRA. Taxpayers have also taken lower tax bracket years and used that as an opportunity to roll funds from a traditional plan to a Roth and pay the current tax while then allowing the funds to grow tax free until distribution.

In an effort to close the back door Roth IRA contributions the proposed bill would eliminate Roth conversions for IRAs for single taxpayers with taxable income over $400,000 and married filing joint taxpayers with taxable income over $450,000. Additionally, the bill would prohibit all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth IRA’s. There is no income threshold attached to this change.

Capital Gains

Tax rates for long-term capital gains have not changed for 2021. However, similar to the tax tables, the income thresholds to qualify for the rates have been adjusted. The rates are as follows:


Rate

Single

Married Filing Joint

Head of Household

0%

Up to $40,400

Up to $80,800

Up to $54,100

15%

Up to $445,850

Up to $501,600

Up to $473,750

20%

Over $445,850

Over $501,600

Over $473,750

3.8% Surtax

Modified AGI over $200,000

Modified AGI over $250,000


The proposed bill includes a provision to add an additional capital gains rate of 25%. The proposal for future years also includes capital gains tax for anyone with an AGI of more than $1 million to be taxed at ordinary income tax rates. In effect, this would increase the top marginal rate to 43.4% when taking into account the surtax.

Charitable Contributions

We talk about charity often in our tax communications. For those that are charitably inclined 2021 adds an additional opportunity to give. Under typical tax law, cash contributions are subject to limitation of no more than 60% of a taxpayers adjusted gross income. For 2021, that percentage was increased to 100%. Since itemized deductions have become a thing of the past for many individuals, this change allows for lots of tax planning opportunity. Do you want to take more from your IRA to decrease future RMD’s and also benefit a charity? Do you have cash available in a savings account that you would like to donate or start a donor advised fund?

With the potential change in capital gains rates, it is also worth considering donations of appreciated stock. While these do not get you the same write-off percentage, you can still benefit by allowing these items to grow tax free in a donor advised fund and save yourself from paying the increased capital gains tax.

For more information on HIPPO Tax Services please visit: http://hippotaxllc.com/