As I write this, we are just a few days from the inauguration of President Biden and ushering forth the Biden-Harris administration. To say that the past two months have been interesting, politically, would be an understatement. I had hoped that this election would be a landslide (one way or the other) to give us a feel for our country’s temperament; unfortunately, like the election of 2016, it seems to have further driven the wedge of division. As always, I will keep the new administration in my prayers as they attempt to unite our country.
One unique thing about President-Elect Biden was that he was the first nominee to promise to raise taxes since Walter Mondale in 1984. Mondale insisted his tax hikes would target the wealthy and Reagan’s wouldn’t. It didn’t matter. In that election, Reagan got 525 electoral votes – Mondale got 13, losing the popular vote by 18 million. Howard Gleckman wrote an article for taxpolicycenter.org in which he explained the Biden tax plan as follows: “Biden is reportedly proposing a tax hike of $3.2 trillion over 10 years. Most, though not all, of those tax increases would be paid by high-income taxpayers and corporations. While the campaign has not yet released details, multiple published reports say it would, among other things, tax capital gains as ordinary income, raise the top individual income tax rate to its 2017 level of 39.6 percent, limit itemized deductions for high-income taxpayers, and raise the corporate income tax rate to 28 percent, backstopped with a 15-percent minimum tax and a 21-percent rate on foreign profits.” They have also thrown around the idea of adding a 12% tax to anyone making over $400,000.
Needless to say, there is a good chance we will need to make use of any and all accessible tax planning. So, here are five ways you may be able to save on taxes in 2021.
Fund Your Retirement Account. By saving on a tax-deferred basis through your employer’s 401k or by funding your own traditional IRA, you may be able to deduct those contributions from your income and defer paying taxes on that income and the growth of your savings until you retire.
Go Back to School. The $2,000 lifetime Learning Credit is allowed for certain income earners who attend accredited college courses. A credit is much more valuable than a deduction, as it doesn’t just reduce your income but also lowers your tax bill, dollar for dollar.
Give to Charities. We are currently allowed to deduct from our income the money we give to qualified charities. Not only can this reduce taxable income, it will also give you a sense of joy in making the world a better place.
Make a Baby. This may sound fun, but make sure you weigh the tax benefits against the profound work and cost involved in raising a child for the next 18 years. You may get a $2,000 tax credit for each child you have. Who knows? Triplets could be worth $6,000! Of course, I’m joking around – but if kids were in your future anyway, it may pay to make like Marvin Gaye.
Move the Family. This may sound drastic, but in the current COVID times, it may make sense to work from home in a state with no income tax. Many people from New York and California have moved to states like Tennessee and Texas, both of which do not tax income.
As you do your 2020 tax returns, we advise you to spend extra time with your accountant and make sure you utilize every possible tax-saving strategy. Deductions and credits can be tricky and income limits may affect your ability to use them. Heck, if you made over $400,000, you can’t even use tax credits for your kids! Honestly, I think most of us reading MCM wouldn’t mind having that problem.