2021 Tax Changes and Estate Planning

Among the biggest news to start out this year is the proposed tax plan by President Biden. Should the changes be approved, it’s important to understand how it might impact your financial and estate planning for the year. Here are a few key components of the 2021 tax changes and estate planning considerations.

Increased Tax Rate for High Income Earners

If your household income exceeds $400,000, you may be subject to increased taxes. The tax rates are tiered, so the higher your earnings, the greater the impact. For instance, the tax rate for a married couple earning $500,000 a year would increase from 35% to 39.6% (or roughly $4,000). For married couples earning $800,000 or more, the tax rate would change from 37% to 39.6%. 

Removal of QBI Deduction

The Qualified Business Income (QBI) deduction was introduced a few years ago. It allows self-employed and small business owners to exclude 20% of their net income (if under $163,300) from taxation. Under the Biden tax plan, married couples with income above $400,000 would no longer be eligible for the QBI deduction. 

Cap on Itemized Deductions

Another part of the 2021 tax plan is a cap of 28% for itemized deductions. If you typically leverage itemized deductions to offset earnings and taxes, this will limit your ability to do so. This change will apply specifically to households earning above $400,000. 

Capital Gains Taxes

There’s also a potential change to capital gains tax. This is important as you decide what to buy and sell this year for investments. In 2020, the maximum capital gains rate was 20%. Under Biden’s tax plan, that would increase to 39.6%, a significant increase. Additionally, there’s also a 3.8% surtax for high income earners that will remain in place. If you own real estate investments, using 1031-exchanges and other tax deferral methods will be extremely important this year.

Other 2021 Tax Changes and Estate Planning Considerations

Estate planning and financial planning always go hand-in-hand. Your investment and financial decisions this year will undoubtedly affect your tax burden and the value of your estate. Although the Biden tax plan has not yet been approved, it will apply to the entire 2021 tax year if passed. Your financial decisions now should take into account these potential changes. Consult with your financial advisor and tax accountant to identify ways to minimize your tax burden. As your assets and liabilities change, so should your estate plan. Don’t forget to review and update your plan yearly as well. Contact us for additional information and guidance. The information in this article is meant as a quick overview. Please note that it is not a comprehensive look at the 2021 tax plan or all the ways that it may impact your personal circumstances.