While not the worst thing that has happened in 2020, trying to figure out what to do about taxes for 2021 is a little bit perplexing. It all really comes down to Georgia. So not knowing what will happen, is doing nothing the best option? Maybe not. Here are some things to consider as the year draws to a close.
Accelerate Income into 2020?
One of points of the Biden tax plan is to increase the highest marginal tax bracket. So, if your taxable income is greater than $400,000, you might want to consider trying to pull as much income into 2020 as possible. In case this doesn’t become law, you might only want to go to the top of your current tax bracket.
For those with taxable incomes of less than $400,000, you might still want to fill up your current tax bracket as repealing the Tax Cuts and Jobs Act (TCJA) is also on the agenda. Most will be in a higher tax bracket if the TCJA is repealed, but your taxable income could go down (especially for those who itemize and don’t have dependents). It’s a bit of a toss-up. If you are self-employed, accelerating income into 2020 makes more sense.
Accelerate Itemized Deductions?
Again, if your income is over $400,000 the Biden tax plan is targeting your itemized deductions. The plan will limit the value of your itemized deduction to 26% of the dollar amount you deducted. Currently if you’re in the 37% bracket every dollar you deduct reduces your tax bill by $0.37. In the future, if this becomes law, your tax bill will be reduced by $0.26. So, like income, it may make sense to accelerate itemized deductions into 2020. If the TCJA is repealed there will be a double hit, as itemized deductions were reduced for high-income earners under the old tax law.
If your income is below the threshold, then accelerating deductions is less compelling. You may be in a higher tax bracket next year. But if your income is in the high $200,000 you might be subject to phase out of itemized deductions and taking the deductions this year might help.
If you want to accelerate itemized deductions consider paying your January mortgage early. If you’re state and local taxes are below $10,000 consider paying property taxes this month (if you can). You might also consider making your 2021 charitable contributions in 2020.
Capture Capital Gains?
The capital gains tax rate seems to always be a target of democrat administrations. So, you might want to take capital gains this year (especially if your income is over $400,000) in case they go up. I doubt they’ll go down in the future. By the way, if you think taxes will go up, you probably want to push loss harvesting to next year.
The Biden plan also considers eliminating the step-up in basis when you die. Ignoring the nightmare that will be for the individuals that inherit the asset, you’ll at least reduce the taxes (potentially at a higher rate) that your beneficiaries will pay.
Like I said at the beginning, we don’t really even have a good guess a what will happen with tax policy. Most these suggestions won’t “kill” you if you’re on the wrong side of the prediction and they could help a fair bit if you’re right.
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