According to the Urban-Brookings Tax Policy Center, “The pandemic and federal stimulus led to a huge spike in the number of Americans who either owed no federal income tax or received tax credits from the government.”
They estimate that 107 million households owed no income tax in 2020, up from 76 million or 44% of all tax payers in 2019. While the numbers were higher in 2020, many people do not have to pay income tax in any year. Taxes are paid by the middle and upper class. You would not know that this is true with all of the noise coming out of Washington, D.C.
Last year most families received multiple stimulus check that were also tax free. In the middle of tax season, a change was made where retroactively some unemployment compensation was made non-taxable. You usually do pay federal tax on this money.
Right now there are discussions going on about raising several trillion dollars of taxes.
While none of this is current tax law, it could be soon. Some of the things being discussed are cutting in half the gift and estate tax exemption beginning next year, creating a new top tax bracket and shrinking some others. Also under discussion is increasing the top capital gains tax rate for some people and adding sur taxes to others and eliminating all Roth conversions for some people – possibly as soon as Dec. 31, 2031.
You may want to take steps now if you have large balances in qualified plans.
Currently, there has not been anything officially proposed about rolling back the SALT limitations. This is the deduction for people in super high tax states such as New York, New Jersey and California. Right now, people can deduct up to $10,000 of local taxes. If this is changed, it makes people in Pennsylvania and West Virginia pay a larger share of federal taxes.
If these tax increases pass it will be by the narrowest of votes and likely by one party. Let your politicians know if you are against this huge spending and tax increases.
To pass this legislation, one of the votes in the Senate will have to come from Pennsylvania and one from West Virginia. Many candidates running for House seats pledge their independence. Now is the time to let them know how you feel.
While we are waiting to see what is coming in future tax legislation, we do know what the current law is.
If you want to lower your 2021 taxes that are due, you must look at options and take action before the end of the year.
Maybe you can contribute to a qualified plan, do a Roth conversion or if you itemize, bunch deductions. If you own a business there are many more possibilities, Remember, not all money is taxed the same way.
You might have many options, but just thinking about it will do nothing. You must take action.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.