4 Tax Pitfalls to Avoid in 2021

Before we know it, tax season will be upon us. COVID-19 has caused all types of tragedy and has impacted the world in many ways; it’s also affected many facets of the US economy and driven deficit spending by the U.S. Government. In turn, this will impact our taxes and the planning strategies we implement. Here are a few tax pitfalls to avoid in 2021:

1. Capital gains continue to be an issue

   Mutual funds are comprised of stocks, bonds, and other investment options. Usually, these funds have managers. The managers will then buy and sell different investments as they feel appropriate and they base these decisions on where they feel is the best place to allocate capital. Even index funds and many ETF’s rebalance, which may constitute a buy or sell of various investments inside the fund. When a mutual fund or ETF realizes a gain, it generally has to pass that through to whoever invests in the fund. Now, the managers try to minimize the gains that get passed through to investors, but inevitably, this is not a zero sum game. Depending on the fund, that pass through may be significant, or it could be minimal.

   If your investments are in a non-retirement account, then you could get a 1099 to report capital gains to the IRS when you file your taxes. At the end of a period when markets have risen over a number of years, often these funds don't have “losers” to sell. They only have winners left, so if they want to change positions, they have to sell a winner to put money somewhere else, which creates a capital gain.

   Capital gains pass through to the investors from mutual funds & ETF’s and inadvertently create a tax drag. The tax drag is the capital gains taxes you now have to pay. It’s important to note that there are proposals to raise the tax rate that capital gains are taxed.

2. Tax-loss harvesting is hard to do 

   Tax-loss harvesting is a strategy where a fund tries to take a loser and a winner, and sell one of each if a fund wants to change how it is invested. Most funds strive to do this, but it’s not that easy when we’ve had several years where the market has gone up. Eventually, the fund runs out of losers to offset winners with.

3. Current tax cuts

   In 2018, when the TCJA was passed & signed into law, it temporarily lowered taxes. What many may have forgotten or maybe didn’t know, is that in 2026, we would go back to old rules unless Congress passed additional legislation to make all the cuts permanent. While additional bills made some provisions of the TCJA permanent, its highly unlikely that congress will agree to make all of the provisions permanent. Currently, there is a lot of dialogue in Washington D.C. about how to pay for all the government spending and who will end up paying for it. One thing is certain, some of the tax cuts put in place by the TCJA are likely to change, and potentially be higher in the future. In future blogs, we will address these changes once they are signed into law.

4. Think about who is paying the federal stimulus we’ve seen

   Individual taxes account for the largest portion of the federal gov inflow¹. Who is feeling the pinch the most? If we look back at history, in the early 1980’s and 1970’s, the top tax bracket was 70%! Well, most Americans are not in the top tax bracket. But, if we were to look at a couple who earned $100,000 back in those days, we would see that they would have potentially been in the 59.5% tax bracket. Tax policy is always going to change over time. At the end of the day, you don't have to make $500k to benefit from tax-managed investing so you're not paying a lot to the government. This is something everyone needs to be thinking about.

To learn more about financial strategies you can begin putting in place, schedule a session with us here.

Kind Regards,

Mark Stratton, LUTCF^®, CFP^®, ChSNC^®

Mark Stratton, Registered Representative offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, a Licensed Insurance Agency, 972-387-2929. Financial adviser offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. TSG Financial Strategies LLC is not owned or operated by NYLIFE Securities LLC or its affiliates. AR Insurance License # 7487012. TSG Financial Strategies LLC as well as its affiliates do not provide tax, legal or accounting advice.
This material includes a discussion of one or more tax-related topics. This tax-related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRS penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals.