Given the current tax environment — but also due to broader socio-economic trends — “there is a lot of reason to focus on women and how their financial pictures fit together with their families,” Susan Travis, Managing Director of the Greater Texas Region at Mercer Advisors, said during a recent webinar as part of the firm’s Women and Wealth educational series. For example:
- The total wealth pool owned by women is projected to rise to $93 trillion by 2023.1
- An estimated $30 trillion is projected to be inherited by women over the next 10 years.2
- 95% of women will be the primary financial decision maker for their family during their lifetime.3
Travis joined with Jamie Block, Director in the Rochester, New York office, and Kara Duckworth, Managing Director of Client Experience, to outline several key legislative developments that women in particular should discuss with their financial advisor.
American Rescue Plan Act of 2021
Signed into law by President Biden on March 11, this emergency relief package authorizes nearly $2 trillion in spending to deliver COVID-19 vaccinations, provide economic stimulus payments to U.S. households, and aid state and community recovery efforts. The American Rescue Plan Act also includes three noteworthy adjustments to the federal tax code:
- Unemployment income exemption and benefits extension. Americans with modified adjusted gross income of $150,000 or less who received unemployment benefits in 2020 can exclude up to $10,200 of that income on their federal tax return. Congress also extended unemployment payments for current recipients until September 6, 2021 and provided a supplemental benefit of $300 per week. People who have already submitted their 2020 federal tax returns without claiming the new unemployment exemption can expect to receive a refund in some form from the Internal Revenue Service (IRS) eventually, Block said.
- Child Tax Credit. This benefit for parents will increase from $2,000 to $3,000 per eligible child ($3,600 for children under age 6) for the 2021 tax year only. In addition, parents can claim the credit for their children who turn 17 this year. The IRS announced that some of the Child Tax Credit will be paid in advance later this year. Other related provisions include new income thresholds for eligibility.
- Dependent & Child Care Credit. Congress increased the maximum amount of daycare costs and other eligible expenses that households can claim under this credit in 2021. Not only will millions of families get a larger tax credit when they file their tax return next year, but many more Americans will get the full credit amount for 2021.
Travis noted that while the deadline for filing a 2020 federal tax return has been extended to May 17, 2021, due dates for state tax returns may vary. And for people who submit quarterly estimated tax payments to the IRS, the first installment of the 2021 tax year is still due April 15.
“It’s always important to ask your advisor, who can help make sure you stay on top of things,” she said.
Proposed legislation could bring more tax changes
The presenters also highlighted several actions that the Biden administration has proposed to Congressional leaders which, if enacted, would change many people’s federal tax obligations. Among these proposals:
- Raising the highest tax bracket from 37% to 39.6%, which would apply to people with annual taxable income above $400,000.
- Repealing the Tax Cuts and Jobs Act of 2017, which would result in a lower standard deduction, remove the current limits on some types of itemized deductions, and restore personal exemptions. The current standard deduction of $25,100 for a married couple filing jointly would decrease to around $13,000, adjusted for inflation. “So you can see, then, that a lot more people would probably itemize,” Block said.
- Collecting an additional 6.2% Social Security tax on wages above $400,000 (currently, the 6.2% tax occurs on wages up to $142,800).
- Increasing the capital gains tax rate, currently set at 20% maximum, to equal the ordinary income tax rate—in effect, proposed 39.6%—for people with more than $1 million of income.
- Rolling the estate tax back to 2009 levels, when the top rate was 45% and the exemption limit for single taxpayers was $3.5 million (compared with 40% and $11.7 million, respectively, today).
- Providing a tax credit of up to 28% (instead of the current dollar-for-dollar tax deduction) on retirement plan contributions.
“We’ll have to wait and see what happens” with these proposals, Jamie Block said. “You can only plan for what is current right now.” She added that Mercer Advisors teams will be ready to guide clients through any changes that arise.
How previous legislation affects taxes and retirement
Along with the recently enacted changes and potential new ones that may develop, Block described how the SECURE Act of 2019 continues to influence Americans’ retirement planning. Key SECURE Act changes included:
- Later required minimum distributions (RMDs) from an IRA. Instead of requiring people to take a yearly RMD starting at 70 ½ years of age, they can now wait until age 72 to start.
- No age limit for IRA contributions. People can continue to add money to their IRA indefinitely, provided they have earned income for the year, rather than ceasing to contribute after age 70 ½.
- Penalty-free withdrawals for new parents. Within a year of giving birth or adopting, parents can take up to $5,000 from their retirement accounts without the standard 10% penalty.
- Student loan repayment from 529 Savings Plans. 529 account holders can withdraw up to $10,000 to pay student loan bills.
One SECURE Act component that created greater challenges to estate planning was the elimination of the “stretch” IRA strategy for passing retirement assets to a person’s beneficiaries. With limited exceptions, someone who inherits the proceeds within an IRA must now empty that account within 10 years. Block and Travis said there are other strategies Mercer Advisors can recommend to clients who want to minimize the tax impact on their beneficiaries from that 10-year deadline.
Options include converting assets from a traditional IRA to a Roth IRA and paying the income tax up front, which results in distributions that are tax-free. Another strategy for reducing the tax burden from a large IRA account is to make a qualified charitable distribution and use the resulting income exclusion to help meet charitable obligations while avoiding income recognition when reaching 70 ½ years of age.
The CARES Act, which Congress passed in April 2020 to provide relief in the early weeks of the coronavirus pandemic, also created significant new tax benefits for making charitable donations. This legislation raised the allowable federal income tax deduction for cash donations to public nonprofits from 60% of adjusted gross income to 100%, opening another avenue for reducing your overall tax liability.
Managing health care costs
Another compelling reason why tax and retirement strategies are especially important for women is that “we live longer than men” on average, Block said. “There’s a lot of different opportunities that women should be taking advantage of because we live longer, which means we’re going to have more health expenses as we enter retirement.”
Health savings accounts (HSAs) provide a great opportunity to help offset those costs, she said. HSA contributions are not subject to taxes and the funds can be set aside to pay qualifying medical expenses—indefinitely, in most cases. People have until May 17, 2021, to make HSA contributions for the 2020 tax year and reduce their taxable income.
Because the balance can be rolled over from one year to the next and can be invested, HSAs are an excellent savings option for women and men who anticipate higher health care costs as they age. “That gives you a little safety net”, Block said.
In addition, she said, any remaining HSA balances can be passed to a spouse or other designated beneficiary to use for qualifying medical expenses after you die.
Actions you can take today
The webinar panelists recommended five essential wealth management planning actions:
- Determine your current tax and estate situation. If you haven’t consulted a financial advisor in the past year or more, sitting down with someone to help assess your situation and set future goals is a crucial first step. With an updated financial plan as your baseline, you can make better-informed decisions and see more clearly how different facets of your wealth management picture align.
- Maximize your retirement and HSA contributions. Your advisor can help identify ways to build these assets for the future while also ensuring that your current needs are covered.
- Examine Roth conversions and charitable giving strategies. The U.S. is currently in a historically low-tax environment, but there are signs that the federal government could soon move to increase tax rates significantly. Now may be the ideal time to pay income tax on your retirement assets by moving them into a Roth IRA that will not be taxed in the future. And if you are charitably inclined, consult with your financial advisor about ways to maximize the positive impact of your donations while lowering your tax liability.
- Look for opportunities around realizing capital gains. If you have highly concentrated stock positions or saw your portfolio’s value rise significantly in 2020, check with your advisor about the potential tax advantages and diversification benefits of selling off some of those positions.
- Make sure your plans stay up to date. Because tax laws change frequently, it is a good idea to review your estate planning details with an advisor every year. Regular plan reviews also help ensure your designated beneficiaries, charitable giving objectives, insurance policies, medical expense projections, and other aspects of wealth management stay in harmony.
Want to learn more? Replay our webinar on How Your Wealth Plan and Tax Strategy May be Impacted by the New Administration.
1 “Managing the Next Decade of Women’s Wealth,” Boston Consulting Group, April 9, 2020.
2 “Women and the Great Wealth Transfer,” Investopedia, December 2, 2020.
3 “Financial Experience and Behaviors Among Women,” Prudential Research, July 2010.