Tax Planning

Attainable tax regulation adjustments rely upon the tax planning on the finish of the yr for pure individuals – taxes

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As if another year of the COVID-19 pandemic wasn’t enough to create an unusual landscape for year-end tax planning, Congress continues to negotiate the Budget Reconciliation Act. The proposed Build Back Better Act (BBBA) will certainly contain some significant tax legislation, but there is still a lot of uncertainty about its implications. While we wait to see what tax rules will ultimately be incorporated into the BBBA, here are some year-end tax planning strategies you should consider to reduce your tax liability for 2021.

ACCELERATE AND PUSH UP CAREFULLY

One of the most reliable year-end tactics for lowering taxes has long been to speed up your deductible expenses and defer your income. For example, self-employed people using cash-based bookkeeping can delay bills until the end of December and bring forward planned equipment purchases or estimated state income taxes from early next year to this year.

This technique has always had the caveat that in general you shouldn’t pursue it if you expect to be in a higher tax bracket in the following year. Potential provisions in the BBBA may also make it advisable for certain taxpayers to reverse the strategy for 2021 – that is, accelerate income and defer deductible expenses.

The current version of the BBBA would add a new “surcharge” of 5% on modified adjusted gross income (MAGI) of more than $ 10 million and an additional 3% on incomes in excess of $ 25 million. As a result, top earners could pay a federal marginal income tax of 45% on wages and corporate earnings (current income tax rate of 37% plus 8%). Combined with the net investment income tax, which could be augmented with active business income for transit companies, it could be even higher.

In addition, there is a proposal to temporarily increase the $ 10,000 limit on state and local tax withholding to $ 80,000. Individuals in high-tax countries should consider whether there is any benefit in hastening a 2022 real estate tax or an estimated state income tax payment through 2021, or whether the deduction could be more valuable next year, especially when faced with a higher effective tax rate.

TAKE ADVANTAGE OF YOUR LOSSES

Taxpayers with significant capital gains in 2021 could benefit from “reaping” their losses before the end of the year. Capital losses can be used to offset capital gains, and up to $ 3,000 ($ 1,500 for a separated married couple) in excess losses (those in excess of annual profit) can be offset against ordinary income. Remaining losses can be carried forward indefinitely.

However, be aware of the laundry sale rule. In general, the rule prohibits the deduction of a loss if you purchase “essentially identical” investments within 30 days of the date of sale.

Taxpayers, breaking down their deductions, could increase their tax benefits by donating the proceeds from the sale of a written-off investment to a charity. You can offset realized profits as well as claim a donation deduction for the donation.

Satisfy your benevolent inclinations

For 2021, charitable giving can lower taxes for both breakers and non-operators. Taxpayers receiving the standard withholding can claim an over-line deduction of $ 300 ($ 600 for married couples filing together) on cash contributions to qualifying nonprofits.

The adjusted gross income limit for monetary donations is 100% for 2021; In 2022 it should be 60% again. This means that this year you can offset your entire taxable income with donations to charity (donations to foundation-oriented funds and private foundations are not eligible, however).

Taxpayers, who usually do not break down, can benefit by “pooling” their charitable contributions. In other words, delaying or accelerating contributions in a tax year to exceed the standard deduction and claim individual deductions. For example, if you usually donate at the end of the year, you can pool donations in alternate years – say, donate in January and December 2022 and January and December 2024.

Retired taxpayers who are 70½ years old and older can reduce their taxable income by making qualified charitable contributions of up to $ 100,000 from their non-Roth IRAs. Retired or not, individuals 72 and older can use such contributions to meet their Minimum Annual Distributions (RMDs). Note that RMDs have been suspended for 2020 but will be effective for 2021.

As long as the assets are considered long-term in the event of a sale, gifts of valued assets offer a double tax benefit. You avoid capital gains tax on the increase in value and can deduct the market value of the asset at the time of the gift.

CONVERT TRADITIONAL IRAS TO ROTH IRAS

As in 2020 when many taxpayers had sub-par income, 2021 could be a good time to convert funds in traditional pre-tax IRAs to a Roth after-tax IRA. Roth IRAs do not have RMDs and distributions are tax-free.

You will have to pay income tax on the converted funds, but it is better to do so while you are subject to lower tax rates. Similarly, if you convert securities that have depreciated, your tax may be lower than later – and any subsequent appreciation during the Roth IRA is tax-free.

It is worth noting that President Biden had proposed that a provision be included in the BBBA that would limit the ability of wealthy individuals to participate in Roth conversions. There has been a lot of back-and-forth over these provisions, and the latest version of the House Bill has some restrictions. Whether these provisions will survive any Senate changes remains to be seen, but the proposal could be a harbinger of future proposed restrictions.

PROCEED WITH CAUTION

The strategies outlined above always have pros and cons, but perhaps never more than now when negotiating potentially significant tax laws that will come into effect next year. ORBA can help you find the best course for each development.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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