How potential tax-law changes can affect your financial planning

Impact of the Covid-1 pandemic epidemic on the U.S. economy, with the results of the 2020 election, many tax-related laws have been enacted in the last 1 month that could have an impact on you.

The White House recently outlined the second half of the administration’s infrastructure plan, “American Family Planning,” which will cost 8 1.8 trillion over ten years. The cost of this scheme will be met through continuous tax hikes on high income earners. The first half of the plan, called the “American Jobs Plan,” will cost $ 2.25 trillion over 10 years and will pay for corporate tax increases.

As a result of this plan, members of the U.S. Senate and House of Representatives are bringing bills under a broader alphabet of tax code changes. Because of the balance of power in Congress between Democrats and Republicans, especially in the Senate, it is unknown whether any of these bills could become law.

The key to a successful financial plan is to stay up to date on possible tax-law changes and understand how they can affect your financial future. However, your strategic financial planning decisions should be driven by your goals and overall financial strategy. We do not recommend quick decisions based on tax changes – especially proposals that have not been finalized.

Below is a brief analysis of possible tax-law changes.

Consider plans for proposed tax-law changes

The chart below outlines President Biden’s proposed changes to personal taxes. Keep in mind, however, that the process of converting these proposals into actual law in the Tax Code requires Congress to move the proposals through a legal voting process, which takes time. Through that process, these proposals can change dramatically from their current form.

Although current tax laws, such as estate / gift tax exemptions and income tax deduction restrictions, are not specified in the American Family Plan, they can still be amended through the legal process.

Biden’s proposed tax plan

Personal tax rate Raise The highest personal income tax rate is 39.6%.
Capital Gains and Eligible Dividends Tax Rate Raise The rate for taxpayers with household incomes over $ 1 million is 39.6% (excluding 3.8% Medicare Certex).
Raising the foundation at the time of death Eliminate In the first stage of death, the first 1 million discount for a person; First $ 2.5 million discount for married couples; And additional unspecified discounts for family businesses and farms.
1031 or “good kind” exchange for real estate Limit Withdraw capital gains to $ 500,000 while engaging in “similar” exchange transactions.
Child and dependent care tax credit Make permanent Current law provides credit for eligible child care expenses. (See below for current law.)
Child tax credit Stretch (By 2025) the tax credit for children increases ($ 6,00 for a child under the age of;; 3,000 for a child under the age of 1-1) and makes the tax credit permanently fully refundable.

You may want to work with your accountant or attorney to review your current financial situation before building the built-in capital gains and modifying your estate plan.

Consider planning under current tax law

This chart explains the tax-law changes that were made in the last 18 months that could affect your financial planning strategy.

Current tax law

Minimum Distribution for Retirement Account Beneficiaries (RMDs) Generally, RMDs from traditional thematic and chariot leisure accounts must be disbursed within 10 years of the account owner’s death, unless one of the beneficiaries falls into the exception (e.g., a surviving spouse; a minor child; has a disability or chronic illness; Years younger).
2021 RMD required Individuals must meet their 2021 RMD requirements.
Charitable cash contributions For itemized individuals, the 100% Consolidated Gross Income (AGI) limit for cash contributions to a qualified charity (excluding donor-suggested funds or subsidiaries), which was due to expire at the end of 2020, has been extended to 2021.

Individuals who do not itemize their cuts can again cut up to ০০ to00 in charitable contributions in 2021. In addition, for 2021 Only, Joint filers can claim a discount of up to $ 600.

Child and dependent care tax credit For 2021 alone, a tax credit is available (up to 50% of eligible childcare costs for children under 1 year of age), up to $ 6,000,000 for one child – or 000 6,000 for 2 or more children. Families with less than 125 125,000 in credit for up to 1,000. Partial credit is available for families earning between $ 125,000 and $ 400,000. Full-time child care, summer care, and post-school care are eligible child care costs.
Child tax credit Increase the full refundable tax credit for children ($ 3,600 for a child 6 years of age or younger; $ 2,000- $ 3,000 for a child aged 6 to 17), including the ability to take a portion of the credit as an advanced payment.

In light of this newly approved law and the current economic and tax environment, the possibilities for a possible 2021 plan are given below:

Income tax plan

  • Take your RMDs.
  • Decide on strategic donations, especially the timing of donations and the type of resources to donate.

Estate planning

  • Review your estate plan for retirement accounts with nonspouse beneficiaries.
  • Review your estate plan to make sure the assets you leave to your heirs are appropriate for their situation.

Future plans

  • Keep abreast of legal developments and legislation.
  • Look for any possible changes in the context of your personal financial planning goals.

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Vanguard does not provide tax advice. You should discuss your personal situation and needs with your financial or tax advisor.

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