2021 Tax Planning
UNDERSTAND WHERE YOUR FEDERAL TAX DOLLARS GO
In this guide, we will explore where your tax dollars go and some of the ways tax filing may look different in 2021 as well as what you can do to prepare. Keep in mind, this guide is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your strategy.
Before we dive into the upcoming tax brackets and what you can do to prepare for 2021, it can be helpful to understand precisely where the government allocates your federal tax dollars.
HOW TO PREPARE FOR THE 2020 TAX SEASON
MEDICARE, MEDICAID, MARKETPLACE SUBSIDIES, AND CHIP
The Medicare, Medicaid, Affordable Care Act (ACA) marketplace subsidies, and Children’s Health Insurance Program (CHIP) together accounted for $1.1 trillion in 2019 or 25% of the budget.1
Another $697 billion was paid for defense and security-related international activities. The bulk of the spending in this category reflects the underlying costs of the Defense Department. This includes the cost of multiple defense initiatives and related activities, described as Overseas Contingency Operations in the budget.1
Twenty-three percent of the budget, or $1 trillion, was paid for Social Security, which provided monthly retirement benefits averaging $1,503 to 45 million retired workers. Social Security also provided benefits to 3 million spouses and children of retired workers, 6 million surviving children and spouses of deceased workers, and 10 million disabled workers and their eligible dependents in December 2019.1
A NOTE REGARDING COVID-19 AND 2020
As many are no doubt aware, the coronavirus pandemic wrought massive changes to the financial landscape. Although it is highly unlikely that the same scale of change will be seen in 2021, these historic changes are worth noting. In 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law, giving taxpayers the option to skip required minimum distributions (RMDs) from traditional individual retirement accounts (IRAs) and 401(k)-style plans. In addition, the IRS allowed taxpayers an extension until July 15 to file their Form 1040. July 15 was also the deadline to pay any federal taxes owed for 2019.2,3
THE TAX BRACKETS
The tax brackets are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.4
These modest changes to the tax brackets also mean that wage earners may fall into lower brackets. Here is one example. A single filer at $83,000 in taxable income would fall into the 24% bracket for tax year 2018. The filer would be in the 22% tax bracket in 2020.
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Footnotes & Disclosures
Julie M. Murphy, CFP®, CLU®, ChFC®, MBA
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through Sequoia Wealth Management LLC, a registered investment advisor. Sequoia Wealth Management LLC and JMC Wealth Management, Inc are separate entities from LPL Financial.
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- Cbpp.org, April 9, 2020
- Under the SECURE Act, once you reach age 72, you must begin taking required minimum distributions from your 401(k) or other defined-contribution plans in most circumstances. Withdrawals from your 401(k) or other defined-contribution plans taxes as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
Also under the SECURE Act, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA) in most circumstances. Withdrawals from Traditional IRAs are taxes as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
The CARES Act temporarily suspended the 10% federal income tax for both defined contribution plans and IRAs for coronavirus-related distributions.
- IRS.gov, June 23, 2020
- Debt.org, October 19, 2020
- Consumerismcommentary.com, May 31, 2020
- HRblock.com, October 24, 2019
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- Efile.com, August 17, 2020
- IRS.gov, 2020