2021 Beginning Of Year Planning

2021 Beginning Of Year Planning

Planning Topics to Consider as we Kick Off a New Year and a New Administration

Wow, 2020 was a year like no other, and is now, gladly in the rear view mirror. Now that we have a fresh year ahead of us, new leadership for the country, and an actual vaccine for the virus, let’s focus on what we can control and take action on in 2021.

Anticipated changes to tax laws for Individuals and Corporations 

The seemingly endless 2020 election is finally over, with the Democrats gaining a majority in Congress. While it's likely more dramatic tax policy changes will continue to be difficult to push through without a supermajority, we do expect some changes to be implemented where a simple majority passes.

First, it seems likely the top individual income tax rate will be raised back to the 39.6% level from before the Tax Cuts and Jobs Act (TCJA) of 2018. It's unclear whether the effective date of this increase would be applied retroactively to 1/1/2021 or go into effect in the future.

Second, the corporate tax rates will likely be raised to 28%. While a significant increase from the current rate of 21%, it is a middle ground compromise from the 35% rate pre-TCJA. We look at this as a "glass half full" move. Before the TCJA, the corporate tax rate hadn't been at 21% since the 1930s, so, candidly, there was almost no way that rate would remain in place for a long period of time. If the corporate tax rate is "only" raised back to 28% under a Democratic majority, we would almost consider that a win.

Third, the limit on state and local tax deductions is likely to double from its current $10,000 limit in the TCJA to at least $20,000. This would be a welcome change for those who live in "tax-onerous" states.

President Biden has other tax policy changes in his agenda, but in our opinion they will be more difficult to push through Congress. Here are a few of the more notable policy changes that have been discussed:

- Eliminating the step-up in basis at death for inherited assets – this would be very hard to pass given the difficulty in determining cost basis for assets purchased long ago.

- Reducing the Estate Tax Exclusion limit on what can be passed to heirs tax-free – currently the limit is $11.7 million but it will likely drop to a range between $5.5 million where it was before the TCJA and $7 million. This change would be much simpler and more palatable to pass than eliminating the step-up in cost basis at death.

- Treating capital gains and dividends as earned income for those with income amounts in excess of $1 million – this would increase the tax rate from 20% (23.8% including the Net Investment Income Tax) to 37% or possibly 39.6% if the top bracket rate is raised (30.8% or 43.4% including the Net Investment Income Tax), nearly doubling this tax rate for these high income earners. We don't see this change coming to fruition – it's more likely the capital gains rate will simply increase for high income earners.

- Eliminating the income cap on the Social Security tax of 12.4% for those with earned income in excess of $400,000 – currently this tax is capped at $137,700 of income, and this dramatic change seems unlikely to pass.

- Changing the dollar for dollar tax deduction for retirement contributions to a tax credit of approximately 26% of the value of contributions – in practice, this would benefit low-income savers more than high-income savers. This idea is not without merit, but has a very steep hill to climb to implementation not only administratively but also psychologically as a dramatic change to "the way things have been done" for the average American for decades is not easily overcome.

As we all know, the only thing that doesn’t change, is change itself. Once we get a clearer picture of the priorities of the new Biden Administration, we can continue to adapt and adopt new and different planning techniques to help each of your families achieve your best and most desired outcomes!!

Review your portfolio allocation, NOT just your portfolio balances 

At Dashboard, we made some early adjustments in the first week of January to rebalance our portfolios back to targeted risk profiles. This was made necessary by an unusually robust equity market after a short but deep reduction in equity prices caused by COVID-19 concerns. While it seems that the equity markets can only go up nowadays, we know all too well that complacency leads to heartache.

We must be vigilant AND take action to ensure that our long-term goals and strategies are challenged and adjusted as needed during both good as well as challenging times.

 Set your "Cash Zero" (understanding your spend rate) 

There are two ways to determine how much your family really spends:

Option 1 - Tally every single expense that your family incurs over the course of a year...all 2,200+ of them (on average)

Option 2 - Leave your desired “Cash Zero” in your checking account – we recommend approximately 6 months of living expenses. Then, periodically check your cash balance against your “Cash Zero” amount.

To track your spending, all you need to know is how much your family saves per month. By subtracting your savings and the difference between your cash balance and your "Cash Zero" from your income, you get your Spend Rate. This math of subtraction is much easier than adding up spending (and it’s typically a lot more accurate)!! Watch our VIDEO about Calculating your Annual Spend Rate for more details.

Build a moat...but then enjoy life in the castle 

In addition to one’s "Cash Zero" identified above, we challenge all of our clients to look forward 12-24 months and identify all anticipated big ticket expenditures (New pool in the backyard, basement renovations, new car for yourself or your college grad, cruise to the Cayman Islands when cruise ships sail again, etc.). Let’s set aside the capital for these big ticket expenses now.

Then, we can rest comfortably knowing that we’ve effectively built the "moat around our castle" with both our "Cash Zero" as well as our big ticket needs accounted for. Now we can enjoy life in our castle, turn down the ever-distracting noise from both Wall Street and Washington, and focus on our long-term goals and desires.

For more discussion on this topic, including other ideas to consider when "building your moat", check out the dedicated ARTICLE

Charitable Giving using Required Minimum Distributions (RMDs) 

The tax reform that went into effect in 2018 nearly doubled the Standard Deduction, leading many families to file with the Standard Deduction as opposed to Itemized Deductions. As such, the tax benefits of "normal" charitable giving have been greatly diminished. However, if you’re charitably inclined, there is still a way to "get the best of both worlds".

Over Age 70½
For those over 70½, all charitable giving should be done from existing IRA balances (up to $100,000 per year). By doing so, not only do you avoid paying ANY federal or state income taxes on IRA distributions, but these gifts ALSO satisfy any Required Minimum Distribution (RMD) requirements for that tax year. As we like to say, this is the "Mack Daddy" method to charitable giving!

Under Age 70½
For those under 70½, rather than giving annual amounts directly to charities, we encourage families to "stack" their charitable gifts for many years into one year. This can be done in various ways, but one common and easy way is through the use of a Donor Advised Fund. "Stacking" your gifts will create a large tax deduction in a single tax year, and then the actual Donor Advised Fund can be disbursed to the desired charities over many many years to come. "Donating" highly appreciated assets in lieu of cash to fund your Donor Advised Fund may be an even better strategy. By doing so, the donor receives a tax deduction based on the appreciated value of the asset AND avoids paying Capital Gains Tax on the appreciation – WIN WIN!! 

Invest in Kids IL State Tax Credit program 

If you’re charitably inclined, live in the state of Illinois, and are not a huge fan of paying state taxes, here’s something to consider. In 2017, Illinois enacted the Invest in Kids Scholarship Tax Credit Program. This program offers a 75% state tax credit and is used to provide scholarships to families who meet the income requirements to attend qualified, non-public schools in Illinois.

Here's how it works... If your family makes $250,000, your state tax bill would approximate $12,375 ($250,000 X 4.95% = $12,375). You could either pay state taxes of $12,375, or donate $16,500 ($16,500 X 75% = $12,375 state tax liability) to the Invest in Kids program. 

DO NOT contribute directly to your Roth 401k at work 

As many of you know, at Dashboard we’re huge fans of Roth IRA’s and Roth 401k’s. However, now is the time to "fix" your 401k elections at work. If your 401k plan allows for Roth 401k contributions, see if it also allows for "In-Plan" conversions of Traditional 401k amounts into your Roth 401k. If so, then first make all 401k contributions on a Traditional pre-tax basis. Then, periodically, convert your Traditional 401k assets to your Roth 401k and pay Federal tax.

In many states (including Illinois), this conversion does not require the payment of State taxes. Therefore, by using this In-Plan conversion strategy, rather than direct Roth contributions, you can save $965 per year ($19,500 X 4.95% state tax = $965) if under age 50, and upward of $1,287 per year ($26,000 X 4.95% state tax = $1,287) if over 50. 

Send a letter to the IRS again... seriously 

Currently, the U.S. Supreme Court is hearing a case regarding the constitutional validity of certain aspects of the Affordable Care Act (ACA). The decision on this most likely won’t be known until mid-summer of 2021 at the earliest. In the unlikely event that the Court retroactively overturns the ACA, various taxes imposed under the ACA may be refundable to those taxpayers that previously paid them.

Any refund of the 2017 tax return will only be available if the statute of limitations has not expired on the 2017 tax returns. AS SUCH, YOU CAN FILE A PROTECTIVE CLAIM ON YOUR 2017 TAX RETURN TO KEEP THE STATUTE OF LIMITATIONS OPEN FOR YOUR 2017 TAX YEAR. Please email or call us at the office and we can send you our template of this form! (You may remember, we did the same thing for the 2016 tax year.) 


Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Raymond James Financial Services, Inc. and its advisor do not provide advice on tax or legal issues, these matters should be discussed with the appropriate professional.