After having read several economists’ reports regarding what they expect Federal tax policy will look like for 2021, I believe the most likely case is that any change in tax rates that Congress passes and President Biden signs will go into effect as of 1/1/22 and not retroactive to 1/1/21. Though there is a strong urge to purge anything and everything that the Trump administration did including tax cuts, I believe the remaining issues related to the economic troubles we face as a result of Covid will outweigh the urge to purge. Raising taxes during slow economic times is contrary to Keynesian orthodoxy and it makes no sense to raise taxes while at the same time writing checks directly to the citizenry. I believe you can count on current tax rates for individuals, corporations, and estates to remain as they currently are for 2021.
Better For Planning
If I am correct, then it would be really good for financial planners and/or anyone else who does their financial and tax planning for themselves. Uncertainty about tax laws and rates is bad because it makes planning difficult, even for a few months out. Conversely, if you know that rates are going to change as of next year and not retroactive to this year, you can make plans this year to address those changes. This goes for individuals, businesses, and estates. For instance, what if Congress doesn’t take up the tax debate until late in Q1 or even after that and doesn’t get it passed for a bit longer? If the law were to be retroactive back several months, then that would really be moving the goal posts well after the game has started. We need to be able to count on laws that are on the books at the start of the year remaining on the books for the entire year. Otherwise you have to change your entire attack in the middle of the game, and that is a recipe for disaster. Surely the new Congress and President recognize this, right?
Individual Tax Rates
For most of us, the rates that are most pertinent are Individual Tax Rates. The following are 2021 tax rates, taken from the IRS.gov website:
The tax items for tax year 2021 of greatest interest to most taxpayers include the following dollar amounts:
- The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for tax year 2021, up $150.
- The personal exemption for tax year 2021 remains at 0, as it was for 2020; this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
- Marginal Rates: For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:
- 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
- 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
- 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
- 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
- 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
- The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
If in fact these rates remain the law through 2021, think about how you might use this standard deduction and these tax brackets to minimize your tax burden this year. Alternatively, perhaps use this information to pay taxes this year at a lower rate so that you don’t pay even higher taxes next year if and when the law changes. Hopefully soon you will have the proposed new tax laws and brackets to help you with that planning.
With the Democrats in power in DC and with astronomical budget deficits due to efforts to prop up the economy as a result of Covid, I think it is a pretty safe bet that taxes will be going up. However, I believe part of the recovery plan will be to keep them at their current lower rates this year, then raise them in 2022 when hopefully Covid will not be as much of a problem. Let’s see if I and the others who agree with me are correct.