To Our Clients and Friends:
As we approach year-end, it is time to think about steps you may take to help reduce your 2021 tax bill. In what appears to be the new normal, 2021 is shaping up to be a year with plenty of tax law changes. COVID-related disaster relief, signed into law last December, made several favorable (mostly temporary) changes to the 2021 rules. In March, the American Rescue Plan Act, with another set of tax law changes, was enacted.
In addition to the known changes impacting 2021, we may also end the year with some other big (and probably not so favorable) tax law changes. As you undoubtably know, President Biden has proposed raising the ordinary income and capital gains tax rates on individuals. The ordinary income tax rate increase is proposed to take effect in 2022. Some members of the House are trying to make any increase in the capital gains rate retroactive to sales after 9/13/2021, but there is no guarantee that will happen. Currently, the House is negotiating to come up with a bill based on the President’s proposals.
Even though we don’t know yet what will become of President Biden’s proposals, there are still many things you might consider doing before year-end to minimize your 2021 tax bill. While uncertainty makes tax planning challenging, putting it off until we know the fate of these proposals may leave you with too little time to make any moves before year end.
Outlined below are some potential year-end tax planning moves
Make Your Plan for Possible Higher Income Tax Rates
If you think that you will be in a higher tax bracket in 2022 than in 2021, the conventional wisdom of deferring income and accelerating deductions is flipped upside down. Instead, you generally should try to accelerate income into 2021 (where it will be taxed at the lower rate) and defer deductions until 2022 when they will generate a bigger tax benefit. Of course, whenever you accelerate income, you must keep the time value of money in mind and realize that you are giving up some deferral to have the income taxed at a lower rate. We can help you determine whether the tax savings associated with accelerating income into 2021 to have it taxed at a lower rate exceeds the cost of giving up the tax deferral.
Bunch Itemized Deductions to Maximize Their Worth:
For 2021, the standard deduction amounts are $12,550 for singles and those who use Married Filing Separate (MFS) status. For Married Filing Joint (MFJ) the standard deduction is $25,100 and $18,800 for Heads of Household (HOH). If your total annual itemizable deductions for 2021 will be close to your standard deduction amount, consider bunching your expenditures for itemized deductions so that they exceed the standard deduction in one year, and then use the standard deduction in the following year. Please note, if you decide to take the standard deduction in 2021 and bunch itemized deductions in 2022, you may still take an “above the line” deduction for charitable contributions in 2021, up to $300 ($600 if MFJ).
Decide Whether Selling Investment Assets before Year-End Makes Sense:
Regardless of whether you think you will be in a higher tax bracket in 2022, you should look at your investment portfolio, held in a taxable account, and see if selling before year-end could make tax sense. To the extent you have capital losses that were recognized earlier this year or capital loss carryovers from before 2021 (or you have some capital losses you can trigger), selling winners before year-end will not result in any tax hit. Triggering short-term capital gains that can be sheltered with capital losses is a sweet deal because net short-term gains would otherwise be taxed at higher ordinary income rates. If you have investments that have declined in value, you may want to take the resulting capital losses this year. Those losses would shelter capital gains, including high-taxed short-term gains, from other 2021 sales.
Take Advantage of Tax Credits Extended through 2021:
Credits are still available for: (1) energy-efficient home improvements, (2) residential energy efficient property (including solar energy equipment), (3) fuel-cell vehicles, (4) electric motorcycles, and (5) alternate fuel vehicle refueling equipment. If you are thinking about purchasing any of these, please let us know. We can help you determine whether your expenditure qualifies for a credit.
Consider a Roth IRA Conversion:
This may be the perfect time to make that Roth conversion you have been considering, especially if you think you will be in a higher tax bracket in 2022. Although you will pay tax as if the assets had been distributed from the traditional IRA, your future Roth IRA distributions can potentially be tax-free. Unlike traditional IRAs, Roth IRAs do not have minimum distribution requirements during the account owner’s lifetime.
Claim the 100% Gain Exclusion for Qualified Small Business Stock:
Are you aware that 100% of the gain on eligible sales of Qualified Small Business Stock (QSBS), that was acquired after 9/27/2010, may be excluded from income? QSBS must be held for more than five years to be eligible for the gain exclusion. For stock acquired before 9/28/2010, either 50% or 75% of the gain (depending on when the QSBS was acquired) can be excluded. Contact us if you think you own stock that may qualify.
Consider Intrafamily Loans:
Interest rates are at a historic low. This scenario creates an attractive opportunity for those interested in assisting family members financially and transferring assets in a tax-efficient manner. Intrafamily loans, along with proper gift tax planning, may be a smart move.
Contribute to a Traditional IRA:
Individuals over the age of 70½, who are still working in 2021, may contribute to a traditional IRA. However, if you are over age 70½ and considering making a charitable donation directly from your IRA (known as a Qualified Charitable Distribution or QCD) in the future, please be advised that making a deductible IRA contribution for years you are age 70½ or older will affect your ability to exclude future QCDs from your taxable income.
We know this letter only covers some of the year-end tax planning moves that could potentially benefit you and your family. So, if you have questions, want more information, or would like our help in designing a year-end planning package that delivers the best tax results for you please do not hesitate to contact us.
Wishing You a Happy Thanksgiving,
Maeda Palius, Jason Janzen, Annika Jensen and the POJ Team
