3 tax management opportunities for 2021
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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:
Gains realized up to 180 days prior from another investment can be deferred until the 2026 calendar year
10% of capital gains realized in 2021 would be excluded if investment in the QOZ is held for at least five years
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.