Congress is looking at multiple potential changes in the tax law in 2021. Nothing is certain yet, but here are some areas where they seem to be focused:
- State and Local Income Tax (SALT) deduction – This itemized deduction item was capped a few years ago at $10,000. However, it appears congress is considering modifications to this limitation. Some of the ideas being discussed are raising it to $15,000, or possibly repealing the cap for taxpayers with income of $400,000 or less. This could be controversial, as these modifications would tend to benefit higher income taxpayers.
- Moderate Tax Increases – There is apparently a few adjustments in tax rates being discussed. For example, there is discussion regarding raising the top individual rate from 37% to 39.6%. In addition, the top rate for capital gains could go from 20% to 28%.
- Corporate Tax Rates – Congress is also considering raising the C-Corp tax rate from 21% to 25% while also having multinational corporations pay higher taxes.
- Retirement Savings – See below.
Potential Changes to Retirement Savings
One area that has the potential for multiple changes is in retirement savings. Some of the ideas being debated by Congress are as follows:
- Required Minimum Distributions (RMD) – Raising the age for requiring distributions from 72 to 75.
- Enhancing tax benefits for small businesses that offer retirement plans.
- Expansion of qualified charitable distributions.
- For the catch-up contributions for employees 50 and older, there is some discussion regarding this coming from post-tax salary rather than pre-tax (i.e. no reduction in wages), in effect treating these contributions as a Roth IRA contribution. Although taxpayers would not get a tax benefit when the contribution is made, all earnings and most withdrawals in the future would be tax free.
- Prohibit contributions to Roth IRAs with account balances greater than $5 million.
- Other limitations to IRAs with significant balances.
Once again, nothing is certain, and it will depend on whether Congress can get enough support to get these passed into law. The debates and discussion are sure to heat up this fall, so we will be keeping an eye on these potential changes and keep you informed.