As we move into the 4th quarter now is the time to begin to look at tax planning for 2021. With the potential for big changes in Washington, this may be the year to do tax planning a little differently.
What do you mean by a little different?
- This may be the year to recognize income and delay deductions. This is the opposite of what we normally suggest in many cases.
What kind of changes are they talking about?
- They are talking about increasing the capital gain and ordinary income rates as well as making changes to the qualified business income deduction
The capital gain rate changes I have heard of.
- Right now, depending on your income, capital gain rates are between 0 – 20% before surcharges. These rates could increase to almost 40% if you income is in the higher brackets.
- We really need to watch this one since there is talk that these increases might be retroactive back to earlier in the year.
What about ordinary income tax rates?
- The top income tax rate, once again before surcharges, is 37%. The proposals are looking to increase this to 39.6%. The 2.6% does not seem to be a lot, but they also might start the higher rate earlier. This would make some of the current 32% or 35% brackets go up also.
- If some of these brackets go up by over 7%, it may make sense to take some of this income this year.
Remind us again what the Qualified Business Income Deduction is again.
- This is a 20% deduction based on certain business income.
- The proposal is looking to limit this deduction for higher-income business owners.
- This would go hand in hand with the corporate tax increase they are looking at.
- Another reason to potentially take some income in this year.
On the deduction side, the proposal is looking to allow for more state taxes to be deducted?
- A couple of years ago, the deduction for state and local taxes was limited to $10,000, but the proposal is looking to increase this amount.
- This could allow more people to itemize in 2022.
That brings up even more planning, right?
- Yes for sure.
- If you are not going to itemize in 2021, but you might in 2022, it may make sense to:
- Push back donations into next year.
- Pay your fourth quarter state estimates in January 2022.
Be sure to talk to a tax professional if you have any questions about Tax Planning in 2021 or would like further assistance.
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.
