Here’s the reason some key retirement contribution figures didn’t change for 2021.
Once upon a time, inflation went hand-in-hand with tax increases. Wages and prices would rise while tax brackets and deduction limits remained unchanged. The same amount of real, inflation-adjusted income would produce a higher payment to the IRS. Taxpayers would fall behind while standing still.
Nowadays we get annual adjustments in most tax figures. Some of these numbers stay the same because of rounding rules, however. They may go up only when accumulated inflation is enough to push them over the next $500 increment, for example.
This is what happened to the key retirement savings figures for 2021. The IRA contribution limit remains at $6,000 ($7,000 if age 50 or older). The ceiling on contributions to 401k and similar plans, including the Thrift Savings Plan for federal employees, stays at $19,500, with the 50-and-over catch-up contribution capped at $6,500. Inflation wasn’t enough to budge the $13,500 limitation for SIMPLE retirement accounts.
Aggressive savers will be disappointed to see these figures repeat for 2021. Look at the bright side, though. We’re stuck on these numbers because of historically tame inflation ⚊ and when it comes to retirement savings, that’s a Very Good Thing.
More retirement plan figures, and other inflation adjustments, are available in our Reference Room.
For 2020 only, we have a special charitable contribution deduction, allowing up to $300 for those who don’t itemize. This allowance doesn’t follow the usual rules, though. Here are three things you’ll want to know about this charitable deduction.
Continue reading “Three Things About That Special Charitable Contribution Deduction”
Our best-selling explanation of restricted stock units, employee stock options, and other equity compensation is now available in a 2019 edition that includes explanation of how last year’s tax changes will affect strategies.
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An extraordinary provision added by the Tax Cuts and Jobs Act makes it possible for taxpayers to defer almost any kind of capital gain and potentially secure additional tax benefits if they invest in a qualified opportunity fund. (Proposed regulations make exceptions for gain from section 1256 contracts or offsetting positions.) You need to make this election during the 180-day period beginning on the day you have the gain, and then show on your tax return that you elect to invoke this provision. Your gain, up to the amount you invest, will not be taxable that year, but instead will become taxable when you sell this investment, or on December 31, 2026, if the investment remains unsold on that date.
Depending on how long you hold this investment, some of that gain may disappear. After five years your basis is increased by 10% of the amount that was deferred, eliminating 10% of the gain from the original sale. Another 5% of that gain disappears if your holding period stretches to seven years. As a final kicker, reaching the ten-year milestone lets you avoid paying tax on any gain from an increase in the value of this investment during your holding period.
A qualified opportunity fund has to be at least 90% invested in properties and businesses in certain low-income areas or adjoining areas. That’s the underlying idea: to revitalize these areas by attracting investment dollars. Those dollars are not targeted to particular types of projects, however. Funds will pursue properties and businesses that provide the highest returns for their investors.
As written in the law, this tax benefit is available to all taxpayers. Anyone who has a capital gain of almost any kind can defer reporting the gain by investing in one of these funds. Yet as of this writing, these investments are available only to accredited investors—those who make over $200,000 per year (or $300,000 with their spouse), or have net worth, excluding their home, above $1,000,000. Members of the general public can’t buy in because the funds haven’t gone through the lengthy, expensive process of getting their offerings registered with the SEC. At least one firm has made an SEC filing that could lead it to become publicly traded as a qualified opportunity fund REIT, so this deferral benefit could eventually become available to all investors. For now, however, this extraordinary new tax benefit is reserved for the wealthy.
Missing the 60-day deadline to complete a rollover after receiving a distribution from a retirement plan or IRA can have painful consequences. There’s a simple solution, though, if you meet the requirements.
Relief from the 60-Day Rollover Deadline