It's 2021 Tax Planning Time!

With just three months left in 2021, there is no better time than now to look at your 2021 taxes.  Almost everyone has already filed their 2020 income tax returns and it’s good to review 2021 year-to-date, do a tax projection for both income and estate taxes and see where you stand and what might be changed or implemented before year-end.  No one likes surprises. And, many tax strategies need to be in place before year-end.

First, let’s review the income changes already in place for 2021. These aren’t too significant for most of you:

• The standard deductions are up a little. Single is $12,550, married filing jointly is $25,100 and over 65 is an extra $1,350 per spouse.
• IRA and Roth contribution amounts are still $6,000 ($7,000 if 50 or over) however, the phase out levels to qualify have increased slightly
• The ability to take a $100,000 amount from your retirement fund and pay it back without tax or penalty is no longer available. This only applied to 2020.
• Major portions of the CARES Act provisions expired in 2020.
• The lifetime learning credit, which can be as much as $2,000, has raised the income levels for qualifying up to $160,000 for joint filers.

Second, let’s look at legislation that could impact taxes for 2021 and beyond. These all could be very significant:

1. Tax hikes from 37% to 39.6% could occur starting in 2022 for taxable income over $509,300 for joint filers and $452,700 for single filers.
2. Capital gains taxes could increase to ordinary rates (43.4%, including net investment tax) for taxpayers with adjusted gross income over $1 million. This is proposed to be applied retroactively to April 2021.
3. Transfers and gifts at the time of death would be subject to capital gains taxes, thereby eliminating the step up in basis. If enacted, this would have a big impact on the estate taxes on any estate, even those owning a modest house that had appreciated over time.
4. The current lifetime gift and estate tax exemption of $11.7 million per person may be decreased in the future to perhaps $5 million or even $3 million per person. This would make more households subject to the estate tax. And, the rate might be increased to 50% from 40%.

Third, let’s look at the likelihood that these proposals would go into effect. 

1. Tax hikes are possible in 2022, particularly if the Senate Democrats use “budget reconciliation” as a technique.
2. Capital gains could also potentially be raised through reconciliation, however a number of Democrats have indicated that they would not agree to raise the rate to ordinary income tax rates but perhaps 28.8%.
3. The elimination of the step up in basis is unlikely according to experts. This has been done twice in the last 50 years and the change was reversed quickly.
4. An estate tax reform could also become law through “reconciliation.”

Fourth, let’s look at some of the strategies you should be considering now:

1. Prepare an income tax projection yourself, with the help or your CPA or the help of your wealth manager. List the 2019 and 2020 actual values and estimate 2021 and 2022.  Compare expected taxes to withholding and estimates and consider possible opportunities for tax savings.
2. Consider a Roth conversion for 2021 and perhaps future years. With Roth accounts you pay the tax once and the money grows forever, regardless of what the tax rates are in the future. For more details, please see our blog of July 22.
3. Consider the use of Donor Advised Funds and/or Qualified Charitable Distributions to get more “bank from your buck” for your philanthropy.
4. Consider maximizing your contributions to retirement plans including your 401(k).
5. Prepare (with the help of your estate attorney, CPA, and/or wealth manager) a calculation of your estate and related taxes as of today and as of your end of life. Use varying amounts of returns on assets, estate exemptions and tax rates, both federal and state, where appropriate.
6. Review possible strategies to reduce your estate, particularly those where gifting now removes further appreciation from being subject to estate taxes. For more details, please see our blog of June 11. 

No one knows what, if any, changes will ultimately be made to the income tax and estate tax rules, particularly with a divided Congress.  However, there are strategies available to you now for both income taxes and estate taxes that can be put in place now that will provide no harm and perhaps very substantial benefit for the future.  As you know, long-term tax minimization is one of our DWM goals and passions in adding value to our clients.  Accordingly, you DWM clients can expect us to contact you during October and November to get information from you and review these and other strategies for you before the end of the year.  It’s 2021 Tax Planning Time!