{"id":7300,"date":"2022-02-24T08:33:18","date_gmt":"2022-02-24T08:33:18","guid":{"rendered":"https:\/\/emoneyadvisor.com\/?post_type=thought_leadership&p=7300"},"modified":"2022-03-04T14:27:03","modified_gmt":"2022-03-04T14:27:03","slug":"understanding-the-2021-tax-season","status":"publish","type":"thought_leadership","link":"https:\/\/emoneyadvisor.com\/blog\/understanding-the-2021-tax-season\/","title":{"rendered":"Understanding the 2021 Tax Season"},"content":{"rendered":"

It’s that time of year again! If you’re a financial professional, taxes are likely top of mind right now.<\/p>\n

While some clients are underway with tax filing, others may be just wrapping up their year-end planning and thinking about what changes are ahead. This is where an advisor, financial planner, or affiliated tax professional can add significant value to the client relationship.<\/p>\n

Why This Tax Season Could Be Especially Impactful<\/h2>\n

The last year has been a bit more chaotic than the norm, to say the least. Overall, 2021 was a huge year of tax policy discussion, but most policy propositions failed to pass due to partisan conflict and differing priorities.<\/p>\n

Additionally, the pandemic was a catalyst for many Americans’ tax situations also becoming increasingly complex. We witnessed many families relocating during a booming housing market and heavy shifts in the labor force. Impacts spanned across those who were employed, unemployed, joining the gig economy, or working across multiple states. For those reasons alone, a closer look at 2021 into 2022 is warranted in many situations.<\/p>\n

In addition, tax legislation is constantly evolving. As I mentioned in a previous blog,\u00a0almost every year there can be modifications to tax code that affect the general public.<\/a>\u00a0The good news? Financial advisors are well-positioned to be a trusted source of guidance to help clients make sense of what has happened, as well as what is on the horizon for their money.<\/p>\n

What Tax Legislation Has Already Passed for 2021<\/h2>\n

SECURE: Setting Every Community Up for Retirement Act<\/em><\/p>\n

The SECURE Act was enacted in 2019. The legislation name is fitting as it addresses how individuals can save for retirement throughout different life stages and situations. Though there are many paths to retirement, it is critical to be financially prepared, especially as people are living longer.<\/p>\n

For 2021, clients should be reminded that since the SECURE Act passed, some retirement planning considerations need to be taken into account.<\/p>\n

Required Minimum Distribution (RMD) Back On<\/em><\/p>\n

An RMD is an Internal Revenue Service-mandated amount of money that must be withdrawn from traditional IRAs, or employer-sponsored retirement accounts each year. Previously, when an individual reached the age of 70.5 years-old during a certain year, they become mandated to take required minimum distributions each year.<\/p>\n

The SECURE Act changed the RMD age to 72, giving our clients a little bit more time before being forced to withdraw from qualified accounts.<\/p>\n

As an additional puzzle piece, the CARES Act put a suspension on RMDs for 2020 in response to the pandemic. Many clients may have gotten a break from RMDs, but they were back in force for 2021. This is also the assumption that should be made going forward, as the CARES Act simply provided a small respite for a strange year in the time of COVID-19.<\/p>\n

Tax Inflation Adjustments<\/em><\/p>\n

The IRS has made inflation adjustments to their tax rate schedules<\/a>, affecting marginal rates, the standard deduction, and the alternative minimum tax exemption, among others.<\/p>\n

From a planning standpoint, having the knowledge of what each year brings gives us the chance to find opportunities for our clients, both with tax planning and structuring a financial plan in general. Most tax or planning software integrates these changes into the functionality.<\/p>\n

American Rescue Plan for Individuals and Families<\/em><\/p>\n

The American Rescue Plan created many tax saving opportunities that clients should take advantage of when filing for tax year 2021.<\/p>\n

Some notable pieces include an expanded Child Tax Credit and increased Child and Dependent Care Credit. For those without children, there are provisions such as the Earned Income Tax Credit. For those who are charitably-minded, the ability to claim a deduction for charitable donations can be helpful\u2014up to $300\/individual or $600\/couple can be deducted even if the taxpayer is taking the standard deduction and not itemizing.<\/p>\n

A Preview of Current Tax Legislation in Review for 2022<\/h2>\n

SECURE Act 2.0 Is Still on Hold<\/em><\/p>\n

SECURE Act 2.0 is a proposed expansion of the changes enacted earlier by the first SECURE Act. The proposed provisions under SECURE Act 2.0 could impact people of all ages.<\/p>\n

For younger workers, the intent is to help them start saving earlier by making employer matches available for those who are also paying off student loans, as well as facilitating retirement savings through automatic enrollment. Those nearing retirement could have more time to save, thanks to raised catch-up contribution limits and delayed RMDs.<\/p>\n

Path for Build Back Better Act Remains Uncertain<\/em><\/p>\n

The Build Back Better Act made its debut last year, but encountered many obstacles. The intention was creating a bill that would address both climate change and economic considerations. Currently, things are still at a standstill as the bill goes back to the drawing board, pending rewrites and the potential to be retooled as Senator Joe Manchin from West Virginia has essentially declared the original plan “dead.”1<\/sup><\/p>\n

Learn More About Tax Planning<\/h2>\n

If you would like to gain more insights into how this will impact individual tax plans, and how financial professionals can use planning technology to help facilitate these important client conversations,\u00a0check out our on-demand webinar*, hosted by me and my colleague, Madeline McAleer, as we take an in-depth look at preparing for this busy\u2014and important\u2014time of year.
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