So far, we’ve delved into the basics of tax planning and explored some common tax strategies. Today, we turn our attention to the evolving landscape of tax laws. It’s crucial to keep abreast of these changes as they can significantly impact your tax planning strategies, as well as your overall financial situation. Let’s discuss some recent tax law changes and how they may affect you.
Overview of Recent Tax Law Changes
Tax laws are continually evolving, with amendments, revisions, and new laws often introduced with each new administration. These changes can alter everything from tax rates and brackets to the number of standard deductions and the availability of certain tax credits. For example, consider the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 and subsequent legislation in response to the COVID-19 pandemic. This included economic impact payments (stimulus checks) to individuals, Paycheck Protection Program (PPP) business loans, and several tax provisions like the ability to carry back net operating losses.
Impact on Individual Taxpayers
Whether you’re an employee, self-employed, or retired, tax law changes can affect you in several ways. These changes can alter the amount of tax you owe, the deductions and credits available to you, and how you plan for the future. For instance, one of the more significant recent changes in U.S. tax law was the American Rescue Plan Act, signed by President Joe Biden in March 2021, developed in response to the COVID-19 pandemic. This legislation included numerous provisions that had a direct impact on individual taxpayers. Here are a few key components:
- Stimulus Payments: The Act provided a third round of direct payments to individuals. Most people received $1,400 for each adult and dependent in their household.
- Child Tax Credit Expansion: The Child Tax Credit was temporarily expanded for the 2021 tax year. The credit increased from $2,000 to $3,000 per child (or $3,600 for children under 6), and was made fully refundable, which means taxpayers could receive the credit as a refund even if it exceeded their tax liability. The age limit for qualifying children was also raised to 17. An important part of this expansion was that the IRS began distributing the credit in advance monthly payments to qualifying families starting in July 2021.
- Unemployment Income: The Act also included a provision that made the first $10,200 of unemployment income non-taxable for households with an adjusted gross income under $150,000 in 2020. This was significant because many people became unemployed due to the COVID-19 pandemic, and this provision reduced the tax burden they faced as a result.
- Expanded and Extended Earned Income Tax Credit: The Act included changes to the Earned Income Tax Credit for childless workers for 2021, nearly tripling the maximum credit and extending eligibility.
Strategies for Dealing with These Changes
Adapting to tax law changes may require adjusting your tax planning strategies. Here are a few ways to cope:
- Stay Informed: Make an effort to stay updated about new tax laws or changes. You can do this by subscribing to newsletters, reading financial news, or consulting with your CPA.
- Work with a CPA: A CPA is well-versed in tax law changes and can provide expert advice on how to adjust your strategies to take advantage of these changes or mitigate any negative impacts.
- Review Your Financial Plan: Tax law changes can impact various aspects of your financial plan, including investment strategies, retirement planning, and estate planning. Regularly reviewing and updating your financial plan can help you stay on track.
Keeping up-to-date with changes in tax laws is a critical aspect of effective tax planning. While it can seem complex and daunting, remember that you don’t have to do it alone. A Certified Public Accountant is a valuable resource who can provide expert guidance in navigating these new regulations and optimizing your tax planning strategies.
Stay tuned for our next blog post where we’ll delve into tax planning for small businesses. As always, feel free to reach out if you have questions about how recent tax law changes might affect your tax planning.