February 9, 2022

Year End Tax Planning & Update On Recent Tax Reform Legislation

After much deliberation and contention, we contention, we are inching closer to a final version of the Build-Back-Better-America (BBBA) spending bill. Much to our surprise, many of the previously anticipated changes to tax rates and estate taxes were omitted from the recent bill. We have enumerated what we feel are the most relevant highlights for our clientele from the recent bill (as of November 3rd):

Surcharge on High Income Taxpayers – Effective 2022

  • 5% Surcharge for Income over $10M ($5M for Married Filing Separate Filers, $200k for Trusts).
  • Additional 3% Surcharge for Income over $25M ($12.5M for Married Filing Separate Filers, $500k for Trusts).
  • Computation of income for surcharge is essentially based on Adjusted Gross Income (AGI) before deductions.

Net Investment Income Tax (NIIT) – Effective 2022

  • Scope expanded to include previously omitted passthrough entities such as S-corporations or limited partnerships with income derived in the ordinary course of a trade or business.

Qualified Small Business Stock (QSBS) – Effective 9/13/21

  • 75% and 100% gain exclusion reduced to 50% for taxpayers with AGI greater than $400k, Unless there was a written, binding contract in effect on 9/12/2021.

State & Local Tax (SALT) Deduction Increase – Effective 1/1/2021

  • Increase in limitation from $10k to $80k.

Limit on Excess Business Loss Deduction (Non-Corporate Taxpayers) – Effective 2021

  • Prevents excess business losses from offsetting other non-business income in excess of $500k ($250k for non-joint filers).
  • Disallowed losses would be carried forward to future years with the limitation applying in each year.

Wash Sale Rules – Effective 2022

  • Scope increased to include commodities, foreign currencies, and digital assets.
  • Mandatory distributions for accounts with values over $10m for taxpayers with income over $450k ($400k for single filers).
  • Limitations on ROTH Conversions for taxpayers with income over $450k ($400k for single filers).

Year-End Tax Planning Considerations for 2021

These pending tax law changes are relevant to all our clients. Please consider our year-end planning suggestions below, as they are likely to be applicable to your tax situation.

Federal Updates

Capital Gains Loss Harvesting: Capital gains tax rates are expected to remain unchanged; consider loss harvesting to offset current year realized gains.

General Charitable Contributions: Donations made to charitable organizations are deductible if taxpayers itemize their deductions. For 2021, non-itemizing taxpayers can claim an above the line deduction up to $600 if married filing jointly ($300 for single filers). Gifting a combination of cash and stock to public charities in 2021 can provide you with a deduction of up to 100% of your adjusted gross income. To reach the 100% limit, you can either donate a combination of stock and cash, or all cash to public charities. To donate a combination of stock and cash, you could gift appreciated stock up to 30% of your AGI. The remaining 70% would need to be paid in cash to public charities. Please note that this does not apply to donor advised funds or private foundations. Please note that this special 100% limitation is expected to sunset in 2021 and the usual 60% of adjusted gross income will apply going forward.

Charitable Contributions of Appreciated Assets: Rather than using cash to support your favorite charity, consider gifting highly appreciated assets held for over one year. This will yield a double tax benefit: you may deduct charitable donations for the fair market value of the donated assets without paying capital gains taxes. Please note that you may take a deduction of charitable gifts of appreciated securities up to 30% of your adjusted gross income.

State and Local Tax (SALT) Deductions Capped: Combined state income taxes and property taxes may see an increase in the deduction cap from $10k to $80k. There may be some benefit in prepaying state and/or property taxes by December 31st.

For taxpayers who are partners or shareholders in a trade or business passthrough entity (S-corporation or partnership): you may want to consider whether it may be beneficial to elect into the new California passthrough entity tax. The California passthrough entity tax is an election for a passthrough entity to pay California taxes at the entity level. This provides a tax deduction to its shareholders or partners without limitation for Federal purposes and a credit for California purposes. We encourage you to ask us about this potential deduction as the calculations are complex and, in some circumstances, may be limited.

IRA Funds: Reminder: Take your Required Minimum Distribution (RMD), if applicable. There was RMD relief during 2020 due to COVID-19, but please note that this is no longer applicable. Separately, you may want to consider a ROTH IRA conversion in 2021 due to pending restrictions.

Mortgage Interest Deduction: Taxpayers looking to purchase new homes may now deduct mortgage interest on loans up to $750,000 of the principal ($375,000 for married filing separate taxpayers). Interest on home equity indebtedness is no longer deductible. For loans written prior to 12/15/17, which are “grandfathered”, interest can be deducted up to $1M of the principal. Refinances after 12/15/17 are still eligible for “grandfathered” treatment if the original debt was secured before 12/15/17. Mortgage loans on rental properties are still fully deductible. Certain loans where proceeds were used for investing purposes may also be deductible as investment interest expense.

Qualified Small Business Stock (QSBS): Gains on sales of Qualified Small Business Stock that is held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100%, depending on your date of purchase. Based on proposed legislation, the 75% and 100% exclusion benefits may no longer apply to you if your income exceeds $400k. Taxpayers should still be eligible to defer recognition of their capital gains by rolling over their proceeds into new QSBS investments.

20% Passthrough Deduction (Section 199A): Your self-employed or passthrough operating business income may be eligible for the deduction. We encourage you to ask us about this potential deduction as the calculations are complex and, in many circumstances, may be limited.

Stock Options: If you own options with fast-approaching expirations dates, or options with exercise prices well below today’s market value, it may be time to consider exercising. When to exercise options is a matter of personal preference contingent upon your own beliefs about the future potential of the stock. However, we must caution that there are major tax implications to consider when exercising. We strongly recommend seeking our advice before exercising options.

Bonus Depreciation: As a reminder, the Tax Cuts and Jobs Act (TCJA) allows full and immediate expensing of 100% of the cost of qualified property acquired and placed in service during the period between September 27, 2017 and January 1, 2023. Additionally, bonus depreciation is available for both new and used qualified property.

Gifting: While the original drafts of tax reform legislation included changes to the lifetime exemption or the maximum amount a person can give over his or her lifetime or at death without incurring federal gift or estate taxes, the current legislation does not include any changes to the lifetime exemption. The amount of the lifetime exemption for the 2021 tax year is $11.7 million and, without any tax law change this year, will continue to be adjusted for inflation each year. Under current tax law, the lifetime exemption is set to sunset at the end of 2025 and revert to $5 million per person in 2026. With the thought that the lifetime exemption may be reduced at some point, you may want to consider your own personal estate and gift planning. In addition, please note that each taxpayer may still make annual exclusion gifts of up to $15,000 per recipient without having to utilize any of their lifetime exemption.

California Updates

Income & Wealth Taxes: California bill AB 1253 was the subject of much debate in 2020. This state bill proposed a large tax increase on taxpayers with incomes greater than $5M. AB 2088 was also introduced during the legislative session and proposed a wealth tax of 0.4% for California residents with net worth above $30 million. Neither bill passed during the 2020 legislative session. Given the state’s revenue, level of reserves, and COVID-19 Federal relief, it is likely that this agenda will not be revisited. Governor Newsom has also indicated that he will not support additional tax increases this year. We will continue to remain vigilant of any resurgence of talks around these bills.

Talk to Us

We are prepared to strategize. Let us help you reap any benefits still allowed by the latest tax reforms. We would be happy to discuss any questions that you may have about minimizing your taxes and maximizing any benefits with actions you can take now, in 2021. Please contact us for specific advice regarding your individual tax planning needs.

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