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Why Taxes Will be a Mess This Year

Has filing your taxes felt confusing in past years? The 2020 tax season is whole different animal. It’s turning into one of the craziest tax seasonwe’ve ever seenLet’s see if we can cut through all the red tape and make some sense of it all. 

New Tax Filing Deadline  

In mid-March, the Internal Revenue Service (IRS) extended the tax deadline from April 15 to May 17, 2021. Good thing, too—it gives filers more time to sort out the moving target that is this year’s tax season. 

However, if you have already filed and you owe taxes this year, the date you scheduled for your bank account withdrawal is pretty much etched in stone. So if you were hoping to take advantage of the extended deadline, you’re out of luck. 

Be aware that the deadline for funding individual retirement accounts (IRAs and Roth IRAs) and health savings accounts (HSAs) has also been extended to May 17. 

Self-employed people or anyone who generates significant income without having taxes withheld should file quarterly estimated tax payments. If this applies to you, be aware that the deadline for your first payment is still April 15, despite the tax deadline moving forward one month. 

Also, the deadline for corporations, partnerships, and non-profits to file tax returns remains April 15, 2021. 

Tax Changes 

The most recent stimulus package, called the American Rescue Plan Act of 2021 (ARPA), implemented several significant tax changes in the middle of tax season. These include: 

  • Unemployment: The first $10,200 per person of unemployment benefits received in 2020 is exempt from income taxes (assuming your income is less than $150,000 ). 
  • Health insurance: If you had health insurance through the marketplace in 2020 and earned more than your estimated income, the need to repay the advance premium tax credit is waived. 

While it’s easy to celebrate these changes, the fact that they came so late is creating incredible confusion. For the tens of millions of Americans who filed their returns before the changes were implemented, the only option is to wait. The IRS hasn’t provided instructions on how to proceed. All they have said is not to amend returns yet. But at some point, the IRS must put a mechanism in place to deal with the millions of incorrect returns. 

Even for those who haven’t filed yet, confusion abounds. Electronic filing is a popular optionbut tax software hasn’t been updated to reflect the changes yet. Many new tax laws enacted after the CARES Act passed a year ago still haven’t filtered through the tax return system! This includes the 10 percent penalty exemption for taking distributions from retirement accounts due to COVID-19. 

How are filers expected to maximize their returns when the tax law keeps changing in significant ways? 

Interest Rates 

The Federal Reserve announced in midMarch that they intended to hold interest rates near 0 percent until 2023. In addition, the Fed plans to continue quantitative easing, the process of injecting money into the economy by purchasing government bonds and other financial assets to expand economic activity and keep interest rates low. Spending is currently at about $120 billion per month. Despite the Fed’s efforts, 30-year mortgage interest rates recently crept above 3 percent for the first time since July 2020. 

The Fed expects the US economy to grow 6.5 percent this year as the pandemic winds down, the country fully reopens, and economic activity spikes. If that estimate holds, it will be the fastest pace since 1983. Meanwhile, unemployment is back down to 6.2 percent. 

Stock Market 

March 17, 2021 was a big milestone for the Dow Jones. The market closed at just over 33,000 points, a new threshold for the Dow that had never been reached before. This milestone occurred just five days after closing above 32,000, making it the fastest 1,000-point increase in the Dow’s history. 

Just remember to keep this in perspective. Increasing by 1,000 points now is a 3 percent increase, compared to a 10 percent increase if the Dow was at 10,000 points. Still, this is certainly a noteworthy market shift. 

Required Minimum Distributions 

The rules regarding required minimum distributions (RMDs) have already changed in the past year, courtesy of the SECURE ActHere’s what happened in 2020: 

  • The 50 percent penalty for failing to take the minimum distribution was waived. 
  • The RMD age rose from 70.5 to 72. 
  • The timeframe for retirement account beneficiaries to empty the account changed from a lifetime to just 10 years. 

RMDs were waived in 2020, but they’re back for 2021. You may find that your required minimum distribution jumped quite high compared to 2019Here’s why this may have happened: 

  • The market performed pretty well last year. 
  • You’re one year older now. 
  • More money has accumulated in the account if you suspended distributions in 2020. 

Looking ahead to 2022, here’s what you can expect from RMDs: 

  • The IRS will issue a new Uniform Lifetime Table used for calculating RMDs to reflect higher life expectancies. 72-year-olds can expect a 6.5 percent reduction in required minimum distributions compared to the current Life Expectancy Factors. 
  • Some professionals speculate that the RMD age may rise to 75. 

Common Traits of Successful Investors 

Five key things set successful investors apart: 

  • Save more: Pay yourself first. Then, make sure everything else gets paid. 
  • Avoid worrying: You can expect great long-term results, no matter what the market is doing in the short term. 
  • Start early: Compound investing is much more powerful if you start saving early. 
  • Stay positive: Having an optimistic outlook helps keep your investments on track. 
  • Have a steady temperament: Consider the bigger picture and don’t lose sight of potential growth despite what may be happening now. 

For answers to your questions about tax changes, interest rates, required minimum distributions, or successful investingplease contact Nelson Financial Planning at 407-629-6477.