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November 2, 2021

Year-End Tax Planning Tips for 2021: Consider Tax Law Changes and Traditional Strategies

This year we experienced new and familiar challenges from the year before, including returning to the office, navigating the ongoing pandemic and keeping up with economical changes. To wrap up the tax year, we’re looking at pending legislation and some tried and true tax strategies to help you plan for what’s to come. There are several pending tax law changes under President Biden that creates uncertainty for the time being. While our planning will continue to evolve going into the new year as legislation is passed, below we dive into potential tax law changes and traditional strategies for individuals and businesses to consider now before any adjustments take effect.

Act Now to Prepare for Pending Tax Law Changes

The House Ways and Means Committee issued a proposal on September 13 under President Biden’s proposed $3.5 trillion plan that would cause widespread changes to current tax law. The changes you could expect to see would impact corporations, estates and high-income individuals. Below are the top five tax law changes that could impact businesses and individuals going into tax season and actions you may want to consider taking now to prepare.

Prepare for the Corporate Tax Rate Increase

The Biden Administration has proposed implementing a graduated corporate tax rate structure. Instead of the current flat rate of 21% that applies today, the new structure is set up to be 18% for the first $400,000 of income, 21% on income up to $5 million and 26.5% on income above $5 million.

Consider Charitable Giving and Accelerating Income to Account for an Individual Tax Rate Increase

Under current law, the top marginal tax rate for individuals is 37%. Under the new tax plan that percentage would rise to 39.6%. This would affect individuals with taxable income of $400,000 and $450,000 for married couples. Here are a couple of planning points to consider to offset this potential increase:

  • Give to your favorite charities this year to take advantage of lower tax brackets in 2021
  • Consider deferring expenses and accelerating business income if your tax bracket could be higher in 2022

Be Aware of the Increase in Capital Gains Rates

Under the proposed changes, the capital gains tax rate would increase from 20% to 25%. The 25% bracket goes into motion once a taxpayer’s income exceeds $445,850 for single tax filers and $501,600 for married couples filing together. Add in the 3.8% surtax on net investment income and the total tax rate would be 28.8% If passed, this new rate would apply to any transactions that occur after September 13, 2021.

There is also a new surtax proposed for high-income earners that equals 3% of a taxpayer’s modified adjusted gross income (AGI). This would include married couples filing a joint return exceeding $5 million. If passed, the surcharge would be effective for taxable years beginning after December 31, 2021.

Gift Now to Take Advantage of Current Gift and Estate Tax Exemption

The Tax Cuts and Jobs Act increased the gift and estate tax exemption significantly. Under the current act, the lifetime estate exclusion amount is $11,700,000 per taxpayer, or $23,400,000 for married couples.This increased exemption is set to sunset at the end of 2025, but the proposed law will likely expedite that – presumably meaning that the credit will revert to its 2010 level of $5,000,000 per individual, indexed for inflation.

Considering these changes, individuals with future taxable estates may want to start thinking about gifting plans to reduce their overall taxable estates. Gifts made using today’s high exemption amounts are protected from future tax when the exemption amounts are reduced. Gifting assets now would allow full advantage of the lifetime exemption while it is at a record high. Grantors want to make sure their current gifts are not below the expected future exclusion, which would just use future exclusion.

Understand Changing Tax Rules Applicable to Grantor Trusts

The current law states that taxpayers can use grantor trusts to push assets out of their estate while they control the trust. Proposed laws have included adding Section 2901 to the Internal Revenue Code, which would treat engagements between grantor trusts and their deemed owners the same as a sale between the owner and a third party that would cause a recognition of income taxes. These proposals will directly affect grantor-retained annuity trusts, spousal lifetime access trusts and irrevocable life insurance trusts. This would go into effect the date the tax legislation is enacted.

Traditional Year-End Tax Strategies to Keep in Mind

While each individual scenario warrants specific recommendations and guidance, here are some traditional items to keep in mind before 2022.

Consider the Qualified Business Income (QBI)

Also known as the “20% Business Deduction”, is a large tax planning strategy. In order to optimize the QBI deduction, careful considerations need to take place to determine year-end bonuses or if considering accelerating or deferring income/expenses.

Maximize 529 Contributions

Some states may allow a deduction for contributions made to a 529 college savings plan in this calendar year. Missouri, for example, allows up to $8,000 per taxpayer to be contributed and deducted on their return. 

Think About a ROTH IRA Conversion to Utilize Lower Tax Brackets

If you are entering retirement, some individuals may find themselves in a unique situation of being in a lower than usual tax bracket. This is a prime opportunity to convert some of your traditional retirement account to a ROTH retirement account. Pay a little extra tax today but will have tax-free growth going forward.

Revaluate Payroll Deductions

Before the last paycheck of the year, see if you should make any adjustments to your pre-tax benefits. Have you contributed enough to your retirement to maximize your company’s match? Also, if you are over 50, you are eligible for an additional $6,000 catch-up contribution. Have you maximized your health savings account (HSA)? If you are over 55, you are eligible for an additional $1,000 catch-up contribution.

Our advisors are closely following the tax law proposals and legislation changes and will continue to publish insights to keep you informed. Contact an Anders advisor below to further discuss your tax planning options.

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