Year-End Planning Amid the Prospect of Tax-Reform Uncertainty by Tony Gutierrez, CPA
Once again, year-end planning is complicated by an uncertain tax landscape that hinges on the government’s ability to pass legislation. As Congress continues to negotiate and pare down the administration’s original $3.5 trillion Build Back Better spending bill, taxpayers must tread carefully when making decisions that could impact their businesses and personal wealth for many years to come.
Individual Tax Planning
The recommendations to raise taxes on high-net-worth individuals have run the gamut from increasing the top rate to 39.6 percent for those making more than $400,000 to the most current proposal that calls for a 5 percent surtax on personal income above $10 million, plus an additional 3 percent on income exceeding $25 million. In both instances, affected taxpayers would also be subject to an expanded 3.8 percent net investment income tax (NIIT) on earnings, including earnings from pass-through businesses.
Potential Action Steps: Accelerate ordinary income recognition into 2021 and postpone deductions to 2022. These tax deductions essentially reduce the amount of income that is subject to tax. For example, individuals may delay until 2022 deductible payments of alimony, real estate taxes and medical expenses. Consideration may also be given to accelerate the sale of appreciated assets (to realize the capital gain in 2021) and deferring capital losses until 2022. For business owners, avoid pre-paying business expenses before the end of the year.
The last quarter is also a good time to estimate your tax liabilities for the year to ensure that the proper amount of taxes has been withheld from your paycheck or that you paid the appropriate amount of estimated tax throughout the year. You generally have until December 31, 2021, to take action and make adjustments that can affect your eventual tax liabilities. This may include increasing end-of-year withholding or maximizing contributions to retirement accounts to reduce your 2021 tax liability.
Although not included in the most recent $1.75 trillion proposal, it is possible that Congress will at some point make good on its initial proposal to impose new restrictions to IRAs and Roth IRA, including limits to annual contributions, increased required minimum distributions for accounts with significant balances and elimination of the tax benefits found in backdoor Roths and Roth IRA conversions.
Potential Action Steps: Consider completing a Roth conversion in 2021 and paying the tax today at the current ordinary tax rate.
Estate Tax Planning
Another provision included in the Build Back Better spending bill is a proposed reduction to the federal estate and gift tax exemption from its current level of $11.7 million for individuals and $23.4 million for married couples to its pre-2018 levels, adjusted for inflation, which would be approximately $6.2 million for individuals and $12.4 million for married couples filing jointly. However, the most recent legislative proposal suggests that taxpayers will not lose the step-up in tax basis on assets transferred at death, which was recommended in the original version of the Build Back Better plan.
Potential Action Steps: Reduce the size of your taxable estate by making tax-free gifts to family members (up to $15,000 per family member for individual taxpayers and up to $30,000 per family member for married taxpayers filing joint returns.) You may also give tax-free gifts of any amount to your spouse or to pay the tuition of medical expenses of another person. Other ways to remove appreciated assets from your taxable estate and reduce your estate’s tax obligations is to donate to charity, make an intrafamily loans or make proper use of certain trusts that meet your unique needs and accomplish your wealth-transfer goals.
Business Tax Planning
While the administration’s original proposal called for increasing the corporate tax rate to 26.5 percent on corporate income of more than $5 million, the latest iteration recommends imposing a 15 percent minimum tax on the profits that large corporations with more than $1 billion report to shareholders as well as a 1 percent tax on corporate stock repurchases. For these businesses, consideration should be given to accelerate income and defer deductions while also weighing whether a change to their existing entity structure might yield greater tax advantages.
Regardless of any changes to existing tax law, the end of a year is an ideal time to meet with your professional advisors to review your existing plans and ensure that said plans continue to meet your evolving life circumstances, needs and goals; including but not limited to asset protection and beneficiary designations.
About the Author: Tony Gutierrez, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he focuses on tax and estate planning for high-net-worth individuals, family offices, and closely held businesses in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at 305-379-7000 or firstname.lastname@example.org.