Tax Laws of 2021 – A Tax Planning Guide

2021 tax planning guide

The new Tax Laws of 2021 will make tax planning a bit more complicated for some taxpayers. Here are some of the key changes that you need to know, including the new contribution limits for IRAs and Roth IRAs. You should also know the impact of the TCJA on deductions for investment income, and cash donations as a tax-saving strategy. The links below will lead you to the free download of this useful guide.

Uncertainty complicates tax planning in 2021

As we enter the year 2021, the tax and spending environment remains uncertain. While the House is expected to remain in Democratic control, the Senate is in Republican hands. This could complicate the trajectory of proposed tax legislation. However, some tax planning is already time-sensitive, requiring a decision before the end of the year. Tax economists are still highly valued even with the current uncertainty. The following are a few things to consider when planning your taxes in 2021.

The American Rescue Plan Act (ARPA) was passed into law in March 2021 to address the ongoing disruption of COVID-19. The ARPA includes third-round economic impact payments (often called stimulus payments), which are claimed as an advance of recovery rebate credit on tax returns in 2021. However, failure to report ARPA payments could cause a significant delay. For that reason, it’s crucial to review your tax planning in advance.

The upcoming tax reform bill was introduced on September 13th. The resulting uncertainty means that many provisions will be removed or modified. And more measures may be added to the bill later on. The last time significant tax-related legislation was passed was 2017, so year-end planning in 2021 should be tempered by the uncertainty of the tax law. You should consult a tax adviser immediately when you experience a life-changing event.

Those with income above the thresholds should consider moving that income into 2021. If possible, move planned business assets into 2021 so that you can take advantage of the lower rates in 2022. Moreover, if you have excess capital gains, you should consider delaying the deductions until 2022. If you are able to do this, you will be better positioned to plan accordingly.

Contribution limits for IRAs and Roth IRAs in 2021

If you’re looking to contribute to your IRA or Roth IRA, there are a few important deadlines to remember. The contribution deadline for the 2021 tax year is April 15th, and the deadline for the 2022 tax year is October 15th. If you file a tax extension, you’ll extend your tax filing deadline, not your contribution deadline. However, if you’re trying to maximize your contributions, it’s a good idea to start saving early.

In 2021, the maximum contributions for both types of IRAs and Roth IRAs are set to increase. The phase-out range for married couples filing jointly is $105,000 to $125,000, while the range for single filers is $0 to $10,000. However, if you’re a high-income earner, it’s worth investing in a Roth IRA.

Unlike traditional IRAs, Roth IRAs have no annual income restrictions. Those who meet certain income ranges can contribute up to a maximum of $56,000. However, the annual contribution limits for traditional IRAs do not apply to the amounts of employer-sponsored retirement accounts. In addition, a married couple filing separate returns may not qualify for the deduction if the modified AGI exceeds $10,000. In addition, if the married couple filed separate returns, the IRA deduction is limited to $10,000 if both spouses live separately.

Traditional IRA and Roth IRAs will no longer have tax-deductible contributions, but if you choose to make a Roth IRA contribution, you can get an additional tax credit worth 10% to 50% of the total amount of your contributions. The credit is particularly valuable if you’re low-income or have a high-income. If you are considering a Roth IRA or a traditional IRA, you should do so soon. You’ll be happy you did.

Cash donations as a tax-saving strategy

In 2021, you can make cash donations to qualified public charities to minimize your taxes. The limits for deductible cash contributions are 60% of your adjusted gross income (AGI). Unused deductions can be carried forward for up to five years. The Cares Act of 2020 extended several benefits, including this one. If you are a taxpayer who takes the standard deduction, you may be able to make above-the-line cash donations in 2021.

You can still claim the deduction for cash donations if you’ve donated appreciated assets over the past year. However, you must make sure you’ve donated the cash to a qualified charity. If you’re donating appreciated stock, you may want to sell it and donate the proceeds. If the donation is more than $250, you should get a written confirmation from the charity stating whether you received value for the money.

If you want to maximize your deduction, you should make a donation in cash rather than a stock. Cash donations are better than stocks because they provide a tax deduction for the entire amount given. If you’re a wealthy donor, you might consider donating more cash in this year. It’s a good idea to consult a philanthropic adviser and financial planner to see which method will help you most.

Donations to nonprofit organizations are still the best way to deduct charitable contributions, but they may not be the best option for everyone. You may want to donate appreciated stock rather than cash, which means that you won’t have to pay capital gains taxes. The IRS also requires that you make a receipt for the donation. For those who give stocks to nonprofit organizations, this strategy can help you reduce your tax bill and potentially even save you money.

In addition to cash donations, you should consider bunching your charitable contributions. This strategy works well if your itemized deductions are below the standard deduction. Alternatively, you can make donations in several years and claim the total deduction for all of those years. The benefit is greater upfront and can even offset capital gains taxes. You can use the same strategy for charitable donations in 2021, and cash donations will continue to be beneficial.

TCJA’s impact on deductions for investment income

The new tax law, known as TCJA, will drastically alter the rules regarding deductions for investment income starting in 2021. For one, TCJA will no longer allow corporations to write off R&D expenses as part of their taxable income. Instead, businesses can claim such expenses as an investment in research and development. Another major change will be the repeal of the corporate alternative minimum tax (AMT).

The TCJA also has provisions that change the tax brackets. Most taxpayers will pay less, and a few will pay slightly higher tax rates. However, the impact will likely be most noticeable for upper-middle-class individuals, where the top marginal tax rate is projected to be 35%. However, this change is not the end of the story. Tax brackets are just one factor affecting tax returns, and the new law will affect many different types of investments.

Until now, businesses could deduct the interest they paid on a valid debt. Under the old rules, this was generally deductible in the year of payment, but there were restrictions. For example, under the previous law, businesses could deduct interest on investments if they incurred a loss that was greater than 30% of the business’s taxable income. This new law also removed the ‘earnings stripping’ rules in SS163(j), which limited the net business interest expense deduction to 30% of the taxpayer’s adjusted taxable income. Small businesses, however, are excluded from the deduction entirely.

The TCJA enacted by Congress has changed the tax system to be modified territorial. While US corporations continue to owe tax on profits earned in the United States, they no longer have to pay US taxes on their dividends from foreign corporations. However, domestic oil and gas extraction, refining and electric generation were eligible for the deduction. However, the repeal of this deduction has a negative impact on the energy sector, which could more than offset the benefits of the TCJA business tax cuts.

The proposed legislation would also eliminate three upcoming tax law changes. This would prevent the tax treatment of investment from becoming worse. For instance, companies will no longer be able to fully deduct their R&D costs until 2022, while they will be required to amortize them over five years. This will result in an increase in the marginal cost of investments and lower growth in the long run.