Key Points

• Proposed legislation may impact the tax on high-income taxpayers, giving added complexity to year-end tax planning strategies.

• Suggested tax changes include surtaxes on the wealthy, possible changes to the cap on state and local taxes, and proposed expansions of the net investment income tax.

• While we can’t predict the future, proactively taking calculated, strategic steps to help improve your overall tax liability is important every year

2020 was a year of tax changes, and 2021 is shaping up to be the same.

This year, the proposed Build Back Better Act (BBBA) includes several significant tax provisions, although they have continued to change from prior proposals. Though nothing has been finalized, many experts believe taxes will almost certainly increase for high-income taxpayers in 2022 in some form or another. Not knowing what the final provisions will look like makes tax planning even more uncertain.

Currently, the new proposals would alter several areas of tax law, including new surtaxes for individuals with modified adjusted gross income that exceeds $10 and $25 million, an expansion of the net investment income tax application to some active business income, and a proposal to increase the cap on the state and local tax deduction. There are also surtaxes proposed on nongrantor trusts with income over $200,000.  Notably absent from the most recent proposal, however, is an increase in capital gain tax rates.

Tax Planning & Changing Tax Laws

It’s difficult to know how these changes will impact clients without a final policy in place. Right now, our clients are concerned about what will get passed by the end of the year (if anything) and how the timing of these modifications will affect them and their ability to make decisions today to reduce their tax liability now and plan for the future.

The Capstone Approach to Tax Planning

Clients wondering about tax law updates can be assured that at Capstone, our tax experts are carefully monitoring any potential legislative changes. We’re ready to make adjustments, if needed, once new tax laws go into effect and the impacts are fully understood.

It’s also important to understand that taxes are only one aspect of financial planning. While taxes may be higher next year, it may also be possible to take advantage of other deductions or benefits in future years. As a result, we don’t typically make significant alterations in our clients’ portfolios based only on taxes.

Financial Planning Advice for Any Tax Season

Regardless of changing legislation, several pieces of tax planning advice are beneficial to consider at the end of any year:

• Accelerate or defer income: Depending on the tax advantages, you may be able to accelerate income into 2021. For example, exercising stock options or selling appreciated investments before year-end may work to your advantage if higher rates are expected in 2022. You could also decide to defer income if overall tax bracket planning works in your favor. Making sure you have maximized retirement savings contributions is one method that provides a longer-term deferral.

• Accelerate or defer deductions: Along the same lines, consider the timing on items that result in tax deductions, such as payments for real estate taxes or charitable contributions. Deferring these deductions until 2022 may also be beneficial when you might realize more significant tax benefits. Bunching deductions into one year can also provide benefits to take advantage of itemized deductions over and above the standard deduction for the year. And don’t forget that, for 2021, taxpayers can also deduct $300 for cash donations ($600 for married couples) “above the line” whether itemizing or not.

• Tax Loss Harvesting: This is another great way to reduce gains for the year if it works for your overall portfolio management. Losses recognized before year-end can help to offset gains you may have taken earlier in the year.

• Take Required Minimum Distributions (RMDs) from your IRA: Depending on your age, be sure you’ve taken your RMD for the year from your account. And don’t forget about RMDs from inherited IRAs as well.

• Convert Traditional IRAs: With the possibility of higher income tax rates in the future, 2021 could also be a good time to consider converting funds in a traditional IRA to an after-tax Roth IRA. Roth IRAs will grow tax-free but have no RMDs, and future distributions generally are tax-free. It should be noted that here have been limitations on this planning tool proposed in versions of the BBBA. In any event, an analysis should be done on this technique for each situation to make sure it is the best option.

• Make a 529 plan contribution: Saving for college is always recommended, and using a 529 Plan can be beneficial. In Illinois, qualified contributions can also reduce a resident’s state taxable income up to certain limits.

• Contribute to your Health Savings Account (HSA): By putting money in an HSA, you can reduce your taxable income in 2021 up to specified limits. The earnings in the account grow tax-free and can be used for qualified medical expenses now or in the future.

• Annual Exclusion Gifts: The BBBA previously contained many provisions that limited several estate planning techniques. While most of these have been eliminated in the most current version, many individuals can benefit from the impact of future estate taxes by utilizing annual exclusion gifts by the end of the year. Currently set at a limit of $15,000 but set to increase to $16,000 in 2022, these annual gifts can add up to some large tax savings in the future.

Tax planning is important throughout the year, not just at year-end. This year has been especially difficult with the continued changes in proposals and uncertainty of how these proposals will ultimately impact the bottom line.

The reality is that no one can know for sure what these changes will bring until a final bill is passed into law. But, by recognizing what’s in our control and being proactive with our clients’ individual situations, we can help our clients plan for a successful financial future.

If you have questions or concerns about your tax situation, please reach out to an advisor at Capstone for assistance.

Disclosures:

This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.