Now that the 2021 stimulus has passed, President Biden will no-doubt shift his focus toward tax reform. And that simply means that tax hikes are on the way! Will you be impacted? And if so, what should you do about it today?
The Last Major Tax Reform
The last major tax reform was the Tax Cuts and Jobs Act of 2017, pushed through by President Trump. This act simplified and reduced taxes for many working Americans.
Remember? Check out the tax bracket changes from 2017 to 2018. With the larger standard tax deduction, we moved from the 25% tax bracket down into the 12% tax bracket, which was very nice for us!
The tax break was great for many people AND it gave the economy a fantastic boost, BUT it didn’t at all help the government spending deficit…
When President Trump went into office, the federal debt was $20 trillion. When he left, the debt had jumped to $28 trillion.
And now, with the recent stimulus, the debt load is sure to spike well beyond $30 trillion shortly.
The 2021 Tax Hikes (my estimate)
The Tax Cuts and Job Act was passed on December 22, 2017, roughly 11 months from when President Trump was inaugurated.
Given the fact that Democrats have control of both the House and the Senate in 2021, I expect similar timing with President Biden’s tax reform. He’ll pass some tax hikes with just enough time to impact the 2021 tax season. Mark my words on that one.
So What Are The Tax Hikes?
No one knows for sure what the tax hikes are yet (since the bill has yet to be created…), but based on his plans when he was running for president…it will likely include the following:
- a tax increase for those earning more than $400,000, from 37% to 39.6%
- for married couples, the tax increase will likely impact those earning more than $628,000
- a tax increase on capital gains over $1,000,000 – from 20% to 39.6%
- estates will be taxed when the value of the estate is $5M or more vs. the current level of nearly $12M
- the child tax credit will be set at $3,000 per child vs. the current $2,000 amount
- the corporate tax will likely move from 21% up to 28%, with a minimum tax of 15% invoked on all companies, regardless of how many loopholes they find
I suspect there will be tax hikes for more of us than just the massive income earners (since the deficit is now so out of control), but we’ll just have to wait and see what’s proposed later in 2021.
What to Do About These Tax Hikes?
So with all these tax revisions, what is it that you should be doing? How can you keep the government’s hands off your money?
If you don’t make a ton of money, you’re not going to have to worry about the rising capital gains tax on a $1 million transaction…but you should be watching what happens to your company when it’s taxed at a 28% rate vs. a 21% rate (oh, and if the minimum wage raises to $15 an hour, this might impact your company negatively as well).
Long story short, if the expenses of your company increase, they might have to eliminate a few jobs…yours being one of them.
Be smart, keep an eye out for risk in your job and always have a fall-back plan — perhaps another job prospect, a side hustle, or a beefy emergency fund…just in case!
By the way, if you end up keeping your job and you have kids, you might actually be better off in 2021. This is because of the increase in the child tax credit – moving from $2,000 to $3,000 per child (or even higher!).
If You’re Looking to Cash in on Capital Gains, Be Careful
I listen to Dave Ramsey often, and in pretty much every segment there’s a caller that’s 65 years old…they have a healthy investment account, but they still owe $250,000 on their house. Dave quickly says, “Right when you hang up the phone with me, take that money out of your investments and pay off that mortgage!” I always cringe a little when he says that.
Why do I cringe?
Because of the capital gains taxes.
Sometimes it’s wise to do things slowly over a few years to keep your tax exposure low, and that’s okay.
If you have a HUGE chunk of money in non-retirement investments and you were going to take them all out to do something big this year… Don’t! Chances are, you’ll be taxed at a 39.6% rate instead of a 20% rate.
What does this really mean?
- If you pulled out $1,000,000 last year, you’d be left with $800,000.
- This year, pull out $1,000,000 and you’ll likely only be left with $600,000…
If You’re Set to Receive a Large Inheritance, Do What You Can to Protect It
Do your parents have a large estate? (Like, a value of $5 million or more)
Are you set to receive a big inheritance?
Then you might want to pay attention to the upcoming tax hikes…
What can the owner of the estate do to protect their money from getting taxed?
According to The Balance, you can:
- gift some funds to charity
- give monetary gifts to family members each year
- set up an irrevocable trust
- give a retirement account
…and many other suggestions. They’re good ones! Check them out!
If You’re a High-Income Earner, Shield as Much of it as Possible
Do you make more than $400,000 a year as a single filer? Or more than $628,000 as a couple? You might try to reduce as much of that taxable income as possible.
How can you reduce your taxable income? Many ways actually!
- Fully fund your 401k/IRA
- Fully fund your health savings account
- Have kids (you know…if you were considering it soon anyway…now is a good time for tax purposes ;)) for the tax credits
- Invest in real estate – with all the deductions, you could show a loss, but the value of your investment will likely have soared!
- Give money away! After all, you probably don’t really need all that money anyway. This way, you can help others, and keep the incompetent government from taking too much of it!
Are You Ready For the Tax Hikes?
So what about you? Are you ready for the tax hikes?
For us, not too much will change. Our tax rates look like they’ll stay the same, and we might even pay less in taxes because of the increased child tax credits!
Will these tax hikes impact you? What will you do differently if the bill goes through this year?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.