Oct 20 21 Updates
Oct 2021 | To date, no significant new tax laws have officially been signed into law; however, several new tax provisions are making their way through Congress through the budget reconciliation bill. We are reasonably certain that there will be tax law changes taking place beginning in 2022, if not earlier. Potential changes include:
Increased Income Tax Rates: The Income Tax rates will increase from 37% to 39.6% for single tax filers with taxable income over $400,000, for married joint tax filers with taxable income over $450,000, and for trusts and estates with taxable income over $12,500.
Increased Capital Gains Rates: The Capital Gains tax rate for long-term capital gains and qualified dividends will increase from 20% to 25% for single tax filers earning more than $400,000 and married joint filers earning more than $450,000.
Expanded NIIT: The net investment income tax (NIIT) is expanded to include active pass-through income for single filers with taxable income greater than $400,000 or joint filers with taxable income greater than $500,000.
New Surcharge for Higher MAGI: A new 3% surcharge will be assessed on single filers with a modified adjusted gross income (“MAGI”) greater than $2.5 million, joint filers with a MAGI greater than $5 million, and trusts and estates with a MAGI greater than $100,000.
Corporate Tax Rate Increase: The corporate tax rate would increase from 21% to 26.5% for corporations with taxable income exceeding $5 million, and the corporate tax rate would be reduced from 21% to 18% for corporations with taxable income below $400,000. The corporate tax rate would remain 21% for corporations with taxable income between
$400,000 and $5 million.
Limitation on 1202 Exclusion: The Section 1202 Exclusion would be scaled back such that the 100%and 75% gain exclusions would no longer be available to taxpayers. However, the 50% exclusion would still be available to such taxpayers.
Gift and Estate Tax Exemption: The exemption amount, currently at $11.7 million per individual, would expire at the end of 2021, as opposed to the end of 2025. The exemption amount would be reduced to approximately $6.03 million per individual.
Actions to Consider - High Level Overview
Accelerate Income: If you will likely be impacted by the increased tax rates and if you have the ability to accelerate your income into the 2021 tax year, you may wish to do so. Since the income tax rates will likely increase, recognizing the income in an earlier year may subject your accelerated income to a lower tax rate.
Defer Deductions: Likewise, you may also want to consider deferring larger deductions for a later year, when the tax rates are higher. Larger charitable contributions, donor advised funds, and certain charitable trusts, are some common methods of increasing your deduction amount.
Estate Planning: If you have not yet utilized your full exemption amount, you may want to consider using some, if not all, of the increased exemption amount before it is reduced back down. The IRS has stated that it will not attempt to claw back any used portions of the exemption amount that are in excess of the later reduced exemption amount.
Roth IRA Conversion: Although converting your traditional IRA into a Roth IRA will cause you to recognize taxable income at the time of conversion, it may be worthwhile to take the tax hit now, while the tax rates are lower, then take the tax hit upon the IRA distribution date when tax rates may be higher.
Tax-Deferral Opportunities: Tax deferral opportunities such as qualified opportunity zones or 1031 exchanges may be worth exploring. Although these options may not eliminate the capital gains tax altogether, they may offer a solution to help defer the payment of these taxes.
Items to Note
SALT: Unfortunately, no provisions were introduced to repeal or expand the $10,000 limitation on the state and local tax deduction. For now, the $10,000 SALT limitation is still in effect for taxpayers who itemize their deductions.
Step-Up in Basis: No provision was introduced to eliminate or dial back the step-up in basis rules for inherited property. As such, certain tax-deferral strategies, such as the 1031 Exchange, still remain highly attractive tax saving strategies.
Retroactive Application: Although most of these provisions would have an effective date of January 1, 2022, or later, some provisions may be effective as of September 14, 2021, the date the legislation was introduced. Such provisions include the capital gains rate increase and the scale back of the Section 1202 Exclusion.
Scheduling Your Confidential and Complimentary Q4 ' 21 Year-end Review
With Dec 31 just around the corner, it you haven't yet scheduled your complimentary confidential year-end consultation it is strongly advised you reach out this week to get our conversation started.
We strongly advise bringing 2021 full year tax projections up-to-date, coupled with the evaluation of multi-scenario year-end tax planning options, and the preparation of preliminary '22 tax projections factoring in the passage of high-probability tax law changes expected to impact you and your family. Timely planning and modelling work can be highly effective in targeting and achieving the lowest tax cash outflows and effective tax rates possible in '21 & '22.
Cobalt PacWest Advisors | CPAs
650.930.9562 | 877.223.5678