2021 Year-End Tax Planning for Individuals
As we near the end of 2021, Congress is still considering a large package of tax changes that could increase taxes in 2022 for wealthier taxpayers while potentially reducing taxes for low to middle-income taxpayers.
Referred to as the Build Back Better Act, the detail of this legislation are still subject to substantial changes as legislators continue to negotiate the terms. It is possible an agreement might not be reached until very late in the year. Some of the tax provisions may be effective as of the enactment date, others could potentially be retroactive, and some might be effective starting in 2022 or later.
In general, tax planning includes accelerating deductions, postponing income, reviewing investment portfolios for possible capital gain or loss realizations, making charitable gifts, and lifetime gifts to family members. However, due to its size, the implications of the Build Back Better Act must be taken into consideration. Unfortunately, it may be enacted too late to act. Therefore, you will benefit from speaking to us now about your situation and year-end plans that might make sense for you within this changing tax landscape.
The Build Back Better plan proposes a larger tax burden for individuals and estates and trusts with high income. These proposals include:
- a modification to the net investment income tax starting in 2022 that would classify pass through income as investment income subject to the NIIT even if the taxpayer materially participates in the business.
- an additional tax of five percent that would apply to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $10 million ($5 million for a married taxpayer filing separately, $200,000 for an estate and trust). An additional three percent tax that would apply to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $15 million ($12.5 million for a married taxpayer filing separately, $500,000 for an estate and trust). The surcharge would apply in tax years beginning after 2021.
- new limits on the favorable tax rules for investment in qualified small business stock. Possibly retroactive to the sale or exchange of qualified small business stock after September 13, 2021, favorable rules will not apply to any taxpayer with adjusted gross income of $400,000 or more, or any estate or trust.
- wash sale rules may apply to a wider range of investments including foreign currency, cryptocurrency and commodities.
Considering the timing for these tax changes, wealthier taxpayers may want to consider accelerating income rather than the usual postponement of income and may also want to consider postponing deductions rather than the usual acceleration of deductions. In addition, a careful review of portfolio investments may be beneficial.
Other December 2021 tax strategies:
- All taxpayers may want to look at year-end charitable contributions to take advantage of the $300 deduction for those claiming the standard deduction or the 100 percent of adjusted gross income limit on those itemizing deductions; both provisions currently expire at the end of 2021
- With a possible significant increase in IRS funding to enhance audit rates of tax returns, taxpayers may want to focus on making sure they have documentation to support all deductions and credits on their tax returns
- Owners of pass-through businesses should consider reviewing possible changes to the 20 percent deduction for qualified business income, disallowance of excess business losses, changes to the taxation of carried interests, and a significant package of changes to the taxation of partnerships.
- There is a proposal to extend residential energy credits in the Build Back Better Act. However, under current law, they are due to expire at the end of 2021. Taxpayers might consider the tax impact for timing installation of energy-efficient exterior windows, doors, skylights, roofs, and insulation, as well as energy efficient heating and air conditioning systems and water heaters to take advantage of the greatest tax savings.
- Under current law, a tax credit may be available in 2021 for a taxpayer who places a new qualified plug-in electric drive motor vehicle in service. The maximum credit is $7,500 and is reduced once a manufacturer sells 200,000 eligible vehicles for use in the United States. However, taxpayers may want to hold off on making that purchase until 2022. Under proposals in the Build Back Better Act, it could mean an additional $5,000 credit. If the credit is not currently available, the tax savings increase to $12,500.
Because of the large scope of the Build Back Better Plan, including retroactive changes to the tax rules, there is no one size fits all for tax planning and any strategy may have unintended consequences if the taxpayer’s situation is not evaluated holistically. Please call our office to schedule an appointment to discuss your tax strategies strategy.