This article was originally published in The Oklahoman
It’s still unclear what tax legislation will pass Congress, but on September 13, 2021, we received more guidance from the House Ways and Means Committee on what to expect. On the surface, it seems likely that tax hikes will be more moderate than initially thought.
It appears that most tax legislation passed will not go into effect until January 1, 2022. The one caveat is the proposed individual long-term capital gains tax rate increase from 20% to 25%, rumored to go into effect retroactively on September 13, 2021, if it passes1. However, if you make less than $400,000, you will likely not be affected much if any by the proposed tax changes2.
It’s important to understand that nothing is final yet, however, this shouldn’t prevent you from thinking ahead. Alan Lakein was quoted as saying “planning is bringing the future into the present so you can do something about it now.” In this spirit, there are smart planning moves you can act upon now while we wait for the final legislation.
It’s true we don’t know what might happen with the federal estate tax exemption, also known as the death tax, which currently sits at $11.7 million per person. Although Biden’s administration has stated they would like to sharply reduce the exemption, we will have to wait and see how this is handled.
Keep in mind that Oklahoma imposes no estate tax; however, it’s possible you may still be affected by one of the 12 states that do if you inherit assets from a resident of one of these states.
If you are charitably minded and are fortunate to make over $400,000 in 2021, you may want to bunch several years of deductions into 2021 by donating a big chunk this year. A donor-advised fund is a great vehicle to consider since you aren’t forced to give it all to your favorite charities in one year.
A couple of other smart charitable strategies to look at involve donating highly appreciated investments such as a stock rather than cash. Let’s say you own $25,000 worth of Apple stock with a contribution basis of $5,000, meaning you have a $20,000 unrealized long-term capital gain. In this example, gifting the Apple stock to a DAF instead of $25,000 in cash allows you to capture a double tax benefit because you not only gain a tax deduction, but also avoid paying the capital gains tax down the road.
If you are over age 70½, you want your charitable gifts to come through Qualified Charitable Distributions from your Individual Retirement Account. This is not a deductible from your tax return, but it will reduce your Adjusted Gross Income. The benefit is that doing so will lower your taxes on Social Security benefits as well as your Medicare premiums.
Roth conversions and contributions may be a great idea for you in 2021 as well. Also, selling investment positions with large long-term capital unrealized gains may make sense. Both moves mean you are realizing more income in 2021. This idea works if you are in the camp that expects to pay a lower tax rate in 2021 than you will in future years.
Generally, higher future taxes enhance the value of the tax-free withdrawal benefits from a Roth or realizing capital gain taxes, but this may change in the future. If you do accelerate taxes, make sure to review your entire income projection to ensure you don’t bump into an undesired tax bracket or incur higher Medicare premium taxes.
You may recall there were no required minimum distributions in 2020, but they’re back this year if you are age 72 or older. If you are a Traditional IRA account holder or a retired 401(k) plan participant, you will need to take the RMD by the end of 2021 to avoid a penalty tax.
Lastly, if you’re participating in a retirement plan such as a 401(k), make sure to maximize your contributions by end of 2021. Unlike IRA accounts, 401(k) deferrals must be made by the end of 2021 rather than by April of 2022.
There is no one-size-fits-all solution when it comes to year-end tax planning. You also should never allow the tax tail to wag the dog. Lowering your taxes is just one factor of developing a smart financial and retirement plan. Hopefully, we will have the final details on the AFP changes before too long, but now is the time to be planning and meeting with your advisors.
Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful and investing involves risks, including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision and there is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.