We have a new administration in Washington, and the Democrats control the House and the Senate. So, what's next for taxes? The national debt is currently on a path to exceed the size of the entire U.S. economy this year, even before a $1.9 trillion relief package under debate in Washington is factored in¹. We need to consider that future fiscal policy will have to address ways to pay off our national debt. One of the ways to do this is through tax law changes.
We don't know when tax laws might change, but we know they will at some point. That's what tax laws do. We can expect lawmakers to focus on urgent issues like vaccine distribution, stimulus aid, and the economy in the near term. But at some point, a new tax plan is likely to show up. The Biden administration is expected to raise taxes, at least for some folks.
If 2022 sees tax rule changes, 2021 might be our last chance to take advantage of the current rules. So, what actions can you take now to make the most of today's low tax rates? Here are some critical areas of your taxes you might want to consider in 2021:
One: Biden's proposed plan targets high-income earners for an income tax hike.² If that's you, 2021 may be an excellent time to consider accelerating income (especially if you own a business) or completing a Roth conversion. These are big moves with financial consequences, so you'll want to get advice before you pull the trigger.
Two: Estate and gift tax exemptions went up to $11.7 million this year, but they might drop again under a new tax plan.³ That makes 2021 a critical year for estate planning. Please don't think new laws couldn't affect a much smaller estate, either. As recently as 2001, the federal estate tax exemption amount was just $675,000.4 It's not likely that new rules would go back to such low levels, but don't get caught flatfooted by a change.
Three: Deductible retirement plan contributions might be treated differently for tax purposes in the future.5 If you're a high earner, maxing out deductible contributions this year and considering a Roth-style plan in the future might be worth considering.
We all love a good sale, and right now, taxes appear to be on “sale”. Consider meeting with us soon to review your 2021 tax planning to see if there are ways in which you could benefit from the “sale”.
"Our new Constitution is now established and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes."—Benjamin Franklin
2 https://www.kiplinger.com/taxes/602109/president-bidens-tax-plans-for-the-next-few-years
3 https://www.kiplinger.com/taxes/601639/estate-tax-exemption
4 https://taxfoundation.org/federal-estate-and-gift-tax-rates-exemptions-and-exclusions-1916-2014/