Income and Estate Tax Changes Advisers Need to Know for 2021

Financial advisers need to stake of stock of impending tax rules to help clients navigate 2021.
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As with most years, 2021 will include some changes to the income and estate tax rules. While there may be more changes in store under the new Biden administration, these changes are scheduled to go in effect for 2021. Here is a look at some of these changes and some potential planning implications for your clients.

Estate and Gift Taxes

For 2021 the exemption for estate and gift taxes increases slightly to $11.7 million from $11.58 per individual, or to $23.4 million for a couple. For clients who may be worried about a drastic decrease in the lifetime exclusion under the Biden administration, this might be the time to do some larger lifetime gifts to heirs before the limits decrease.

For 2021 the annual gift tax exclusion remains at $15,000, your clients can give gifts of $15,000 to as many individuals as they would like.

Standard Deduction

The standard deduction for 2021 increases to $25,100 from $24,800 in 2020 for clients who are married and file jointly. The rates for single filers increase to $12,550 from $12,400 in 2020. For those filing as the head of the household the deduction increases to $18,800 from $18,650 in 2020.

While these increases for 2021 aren’t large, they do raise the bar a little higher for your clients who are trying to itemize. For clients who can do this, a planning idea for 2020 would be to encourage them to bunch deductions into 2020 in order to be able to surpass the lower threshold in order to itemize if possible.

IRA Income Phaseout Ranges

The income phaseouts for deductible contributions to a traditional IRA for clients who are covered by a workplace retirement plan have increased slightly for 2021. The income phaseouts for eligibility to contribute to a Roth IRA have also increased slightly for 2021.

For clients who are covered by a 401(k) or other workplace retirement plan, the income phaseouts governing the ability to make pre-tax contributions a traditional IRA increase in 2021 to:

  • For those who are married and file jointly the phaseout range for AGI is $105,000 to $125,000, up from $104,000 to $124,000 in 2020.
  • The phaseout range for single filers has increased to $66,000 to $76,000 from $65,000 to $75,000 in 2020.
  • For a spouse who is not covered by a workplace retirement plan but is married to a spouse who is covered by one, the phaseout range increases to $198,000 to $208,000 in 2021 from $196,000 to $206,000.

For clients wishing to contribute to a Roth IRA, the income phaseouts also have increased slightly in 2021:

  • For those who are married and file jointly the phaseout range for AGI is $198,000 to $208,000, up from $196,000 to $026,000 in 2020.
  • The phaseout range for single filers has increased to $125,000 to $140,000 from $124,000 to $139,000 in 2020.

While these changes to the phaseout ranges are not huge, they may help clients in their ability to make pre-tax traditional IRA or Roth IRA contributions.

Tax Brackets

The seven tax brackets, ranging from 10% to 37%, have not changed. The upper limits of these brackets have changed slightly for inflation, meaning that clients have a little more room in trying to fill out their tax bracket in 2021. A few examples include:

  • The top marginal rate of 37% for the 2021 tax year kicks in for single filers at an income level of $523,600 up from $518,401 for 2020. For those who are married filing jointly, the top end increased to $628,300 from $622,501.
  • The 32% tax bracket for single filers increases to a range of $164,926 to $209,425 up from $163,301 to $207,350. For those who are married filing jointly, the range increases to $329,851 to $418,850 from $326,601 to $414,700 in 2020.
  • The 24% tax bracket for single filers increases to a range of $86,376 to $164,925 up from $85,526 to $163,300. For those who are married filing jointly, the range increases to $172,751 to $329,850 from $171,051 to 326,600 in 2020.

Charitable Giving

Not a change to the 2021 rules, but rather a 2020 opportunity that goes away at the end of the year. 

As part of the CARES Act, taxpayers can deduct charitable contributions up to 100% of their AGI. The normal maximum is 60% of AGI for cash contributions and 30% for non-cash contributions. Unless something changes, the AGI maximums will revert back to their normal limits in 2021.

For clients who are charitably inclined and who have the means to do so, this might be the year to bunch contributions that might normally be made over several years into 2020 to take advantage of these higher deduction limits. With the performance of the stock market this year, using appreciated securities to make these gifts can be a good strategy to claim the deduction and to avoid capital gains taxes on the sale of the securities.

These are a few income and estate tax changes slated for 2021. There may certainly be others in 2021 and beyond based on the Biden tax plan. There may be some planning opportunities for your clients either as 2020 comes to a close or into 2021 based on these changes.