3 tax management opportunities for 2021

Share this article

As the standard 2020 tax deadline has passed, it’s time to look forward to 2021. Here are three tax management strategies to consider for the 2021 calendar year:

1. Enhanced child care tax credit

As part of the American Rescue Plan Act of 2021, the child tax credit has been expanded. For any dependent child age 17 or younger, you may be eligible for a $3,000 tax credit per child. This credit increases to $3,600 for any child age 6 or younger. This enhanced credit is available for those whose 2020 or 2019 Adjusted Gross Income (AGI) was $75,000 or less for a single filer, and $150,000 or less for joint filers. There is a phase out of benefits: a reduction of $50 for each $1,000 over the AGI threshold. This phase out only impacts the enhanced benefits—you may still be eligible for the $2,000 standard child tax credit. However, the standard $2,000 credit also begins to be phased out for single filers whose AGI is over $200,000; joint filers, $400,000. The standard credit is reduced by $50 for each $1,000 of AGI over the threshold limit.

You may not need to wait until 2021 tax filing to obtain this credit. The IRS intends to make monthly credit payments for families who are eligible from July-December of this year. You could obtain up to half of eligible payments through this program; the remaining credit would be claimed upon filing your 2021 tax return. As of now, no action is required to obtain this advance. The IRS will send letters to eligible recipients and monthly checks should follow shortly thereafter.

And great news for those expecting in 2021—the enhanced credit is available for babies born in the 2021 calendar year!

2. Extension of charitable deduction enhancement

As part of last year’s COVID-relief legislation, in 2020 you were permitted to deduct up to 100% of your AGI through charitable deductions. Historically, this deduction was limited to 60% of your AGI. 

This enhancement has been extended for the 2021 tax year. However, please be mindful that this adjusted benefit still needs to be used in conjunction with other charitable deduction limits. For example, there is still a 30% AGI limit for the donation of publicly traded securities to qualified charities. As a reminder, the added benefit of using appreciated securities is that you also donate away the unrealized gain.

As such, you can still take advantage of the 100% AGI deduction through the careful coordination of donating cash equivalents, appreciated securities and other assets. Please consult with both your tax professional and wealth advisor to devise an appropriate strategy.

3. Final year of added qualified opportunity zone benefits

Qualified Opportunity Zone (QOZ) funds are unique investment vehicles that were established as part of the 2017 Tax Cuts and Jobs Act. Through tax incentives, the intention is to encourage investment into areas throughout the United States that have traditionally been underserved.

There are three main tax benefits to investing into a QOZ:

  1.  Gains realized up to 180 days prior from another investment can be deferred until the 2026 calendar year

  2.  10% of capital gains realized in 2021 would be excluded if investment in the QOZ is held for at least five years

  3.  Gains accrued within the QOZ investment would be excluded from taxation if held for at least ten years

The second tax benefit listed above expires at the end of this calendar year.

For additional consideration is the proposed legislation put forward by the Biden administration regarding the change in capital gains tax rates. While capital gains taxes are deferred until 2026 through investment in a QOZ, those gains will be assessed at the prevailing rate at the time. If your capital gains rate in 2026 is higher than it is today, this is a double-edged sword. On one hand, you may end up paying more in capital gains taxes in 2026 than if you had paid them in 2021. Conversely, if you maintain investment in the QOZ for a 10-year period, you avoid capital gains on the QOZ investment at a potentially higher rate than you would face today.

QOZs are a unique and nuanced investment vehicle—please consult both your tax professional and wealth advisor before executing investment.

Source: irs.gov 


Connect with an advisor

Tax-advantaged investing and retirement

Mesirow does not provide legal or tax advice. Past performance is not indicative of future results. The views expressed above are as of the date given, may change as market or other conditions change, and may differ from views express by other Mesirow associates. This is not a solicitation to buy or sell the securities mentioned. Do not use this information as the sole basis for investment decisions, it is not intended as advice designed to meet the particular needs of an individual investor. Information herein has been obtained from sources which Mesirow believes to be reliable, we do not guarantee its accuracy and such information may be incomplete and/or condensed. All opinions and estimates included herein are subject to change without notice. This communication may contain privileged and/or confidential information. It is intended solely for the use of the addressee. If you are not the intended recipient, you are strictly prohibited from disclosing, copying, distributing or using any of the information. If you receive this communication in error, please contact the sender immediately and destroy the material in its entirety, whether electronic or hard copy. This material is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Mesirow refers to Mesirow Financial Holdings, Inc. and its divisions, subsidiaries and affiliates. The Mesirow name and logo are registered service marks of Mesirow Financial Holdings, Inc. ©2022, Mesirow Financial Holdings, Inc. All rights reserved. Any opinions expressed are subject to change without notice. Past performance is not indicative of future results. Advisory Fees are described in Mesirow Financial Investment Management, Inc.’s Form ADV Part 2A. Advisory services offered through Mesirow Financial Investment Management, Inc. an SEC registered investment advisor. Securities offered by Mesirow Financial, Inc. member FINRA and SIPC.