While it remains unknown what changes President Biden will propose to the tax laws, the following changes are already in place for 2021 that could impact some of your clients:
Estate and gift taxes – personal exemptions
For 2021 the personal exemption for estate and gift taxes increases to $11.7 million per person, up from $11.58 million for 2020. This increase is part of the tax reform package passed in late 2017 and pertains only to gift and estate taxes at the federal level.
This change may not impact the vast majority of your clients, but it could affect some of them. Moreover, there are expectations that the Biden tax plan will seek to lower this lifetime exemption drastically. This expectation might point to the need for clients with larger estates to accelerate some gifts to family members or others.
The standard deduction increases slightly for 2021 to $25,100 for married filing jointly and $12,550 for single filers.
The 2020 levels were $24,800 and $12,400, respectively. While this is not a big increase, the planning opportunity involves potentially bunching deductions into 2021 or a subsequent year to allow your clients to itemize if they normally wouldn’t be able to. This increase can make charitable contributions and other expenses that could potentially be used as itemized deductions more valuable tax-wise for your client.
IRA income phaseouts
The income phaseouts for pre-tax contributions to a traditional IRA account for clients covered by a 401(k) plan or similar workplace retirement plans have increased for 2021. The new limits are:
- For those filing married and joint the 2021 phaseout range for AGI is $105,000 to $125,000, up from $104,000 to $124,000 in 2020.
- For those filing as single, the 2021 phaseout range has increased to $66,000 to $76,000 from $65,000 to $75,000 in 2020.
- For clients not covered by a workplace retirement plan but whose spouse is covered, the phaseout range increases to $198,000 to $208,000 in 2021 from $196,000 to $206,000.
The income phaseout ranges for contributing to a Roth IRA account have also increased slightly for 2021:
- The phase-out range for those married and file jointly is $198,000 to $208,000 of AGI, up from $196,000 to $206,000 in 2020.
- For single filers the range has increased to $125,000 to $140,000 from $124,000 to $139,000 in 2020.
For clients who may be looking to contribute to either a traditional or Roth IRA, these new phase-out ranges might provide a bit more income room for them to do so.
With a new administration in Washington, there will likely be more tax rules enacted in 2021 or beyond. Your clients rely on you to help navigate tax changes and the potential impact to them. You can rely on Pulse to monitor your client portfolios as part of a tax planning strategy. Contact us to learn more.