TRUST & ESTATE PLANNING

Proposed Tax Law for 2021: Actions to Consider Before Year End

12.02.2021 - Craig Richards, Head of Tax Services

Changes can happen quickly and unexpectedly. And so is it with the current tax landscape. Changes that many anticipated with the election of President Biden a year ago along with a Democratic-controlled Congress seem to be much different now as we head into the last weeks of 2021. The Bill now sits with the Senate after passing the House on November 19th. Any changes made in the Senate would need to be approved by the House before making it to the President’s desk.

Changes for Individual Taxpayers

The current version of the Build Back Better Act includes fewer changes for individual taxpayers than previously proposed. The three main tax changes that will impact wealthy individuals are:

  • Raised limit on SALT deductions. The most recent addition to the bill would increase the limit on the deduction of state and local taxes up to $80,000 for 2021-2030, up from the $10,000 limit we have had since 2018 ($40,000 for trusts and estates).
  • Tax increase on income over $10 million. The proposal includes a surcharge of 5% on modified adjusted gross income (MAGI) on individuals above $10 million and an additional 3% on MAGI above $25 million (the thresholds for trusts/estates are much lower at $200k and $500k).
  • Limits on large IRAs and Roth conversions. The proposal would place new limits on large IRAs with balances over $10 million as well as conversions of traditional IRAs to Roth IRAs, but these changes would not go into effect for several years. However, the “back-door Roth” conversion where a taxpayer makes a nondeductible IRA contribution and then converts it to a Roth IRA would be eliminated after 2021.
Fewer Changes than Anticipated

Adjustments to the tax landscape including those from 2017’s Tax Cuts and Jobs Act were thought to be coming when the House’s Ways and Means Committee issued its tax proposal in September. However, the bill looks much different now and does not include many of the items that many were expecting to progress, such as:

  • Tax rate increases to ordinary income, qualified dividends and long-term capital gains
  • Reduction of the $11.7 million exemption for estate and gift taxes
  • Changes to the tax rules for Grantor Trusts
Tax Planning Strategies to Consider for 2021

Additional tax changes are still possible to the Build Back Better Act and we may not know what the final version looks like until the very end of 2021. But based on the most current information, the traditional planning methodology of postponing income into 2022 and accelerating deductions into 2021 might make sense for most taxpayers.

NOTE: For taxpayers that would be affected by the surcharge on high MAGI, accelerating income into 2021 would seem to be worthwhile to avoid an additional tax of 5% or 8% on the excess of their MAGI.

1. Postpone income to future tax years

If possible, postpone income into future tax years. This includes deferring lump-sum income such as bonuses or the sale of a business and postponing capital gains or exercising stock options into a future tax year. Techniques such as these may not reduce your overall tax bill but will postpone the payment of the tax liability for an additional year.

2. Realize losses

While we do not recommend making portfolio decisions for tax reasons alone, if you are planning on selling a security, selling at a loss in the current year rather than waiting until the next tax year can help offset gains and reduce your current year taxable income.

Be careful not to buy the same security 30 days before or after the sale for a loss to avoid the wash sale rules. Also, be sure to use any carryover losses from a prior year to further offset gains in the current year.

3. Give to charity—especially appreciated assets

Consider using appreciated assets instead of cash when planning for your charitable gift giving. Generally, the full market value of the property held for more than a year that you give away can be claimed as a tax deduction.

Keep in mind that while gifting appreciated property usually makes the most sense, 2021 is the final year that you may deduct up to 100% of your adjusted gross income from cash gifts to a public charity (as opposed to 60%).

4. Donate IRA distributions directly to charity

Instead of receiving IRA distributions directly, consider donating them to charity. If you are over 70 1/2 you can transfer up to $100,000 directly to qualified charities. If the transfer is made properly, that $100,000 will not be considered income or a deduction for federal tax purposes.

Inflation Adjustments for 2022

The IRS has recently released inflation related adjustments that you should be aware of for 2022:

  • The annual gift tax exclusion increases from $15,000 to $16,000
  • The gift and estate tax exemption amount will increase from $11,700,000 to $12,060,000
  • Maximum contributions to 401(k), 403(b) and 457 plans increase from $19,500 to $20,500 (Catch-up contribution for those age 50 and older remain at $6,500)
Speak with Your Fiduciary Trust Advisor

We will continue to monitor tax changes in the Build Back Better Act and keep you informed of changes that may affect you. In the meantime, please feel free to reach out to us for advice on how these changes may affect your personal situation.




This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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