If there is one important thing to know when planning year-end, it is to be proactive now. With legislative changes dangerously close and nobody really knows what the final draft budget will look like, planning ahead is essential. Even if nothing changes, which is unlikely, you have a solid plan and are well prepared for what may happen in the next few months.
This is year-end planning with a twist: do what you normally would, but if you think tax laws are about to change, then be ready to do something else.
For example, some of the traditional, time-tested, and routine year-end planning strategies include moving income to the next year and maximizing deductions for that year. This would reduce the current total tax burden for the calendar year 2021. The twist here is that if income tax rates go up, whether because of tax law changes or if you’re expecting higher income in the next year, you want to do the opposite – recognize income this year and defer deductions until next year. This can result in accelerating your income through strategies such as: B. more required minimum payouts from retirement accounts, a Roth IRA conversion or capital gains to generate more income this year.
With regards to deferring deductions, you might want to wait until 2022 to make larger charitable donations, as a charitable deduction with a higher tax rate could be more “worth” from a tax perspective next year than one this year with a lower tax rate . Other deductible expenses, such as medical expenses and certain interest expenses, may be better if covered in 2022.
All of this would contradict conventional wisdom. The challenge here is that it is unclear whether interest rates will rise, and if so, how much and how much. At the time of this writing, the previously proposed increases in ordinary income tax rates and capital gains taxes are no longer included in the latest bill. Instead, a surcharge is now being proposed for individuals with incomes over $ 10 million and trusts with incomes over $ 200,000. However, it is wise to keep in mind that any previously proposed increases may still be possible as the negotiations progress.
Let’s take a look at some other strategies that you should consider.
High net worth and ultra high net worth individuals have to give now
When your assets are large enough to form a taxable estate, year-end planning is even more important. For 2021, the amount exempt from federal gift and inheritance tax is $ 11.7 million per person. According to current law, this tax exemption should expire on December 31, 2025. However, there is a very high likelihood that laws will be passed sooner that abruptly and possibly dramatically reduce the exemption. Previous proposals have suggested that the date could be January 1, 2022.
If you are considering making a meaningful gift for life, now is the time. While we don’t know exactly what the new tax laws might look like, chances are they won’t get any better for wealthy taxpayers. Don’t miss the chance to take advantage of some very beneficial wealth transfer opportunities that this high level of exemption makes possible.
Benefit from relationships of trust
Gone are the days of your grandfather’s trust acting as an immobile black box. Modern trusts are now much more flexible and can be structured in such a way that they continue to meet the needs of your family transparently and across several generations.
Using your time off to give larger gifts to a trust today will give you more time to grow outside of your estate. In addition to the classic advantages of a trust – such as professional management, tax reduction and creditor protection – you can also structure your trust as a grantor trust. Grantor trusts enable trust assets to grow effectively without income tax because all income tax obligations are paid by the grantor. The Schenker trust structure also benefits the donor insofar as all tax payments further reduce the taxable estate, but are not subject to gift tax.
Although there have been numerous legislative proposals in the past year that would have greatly reduced the effectiveness of this strategy, the recent House of Representatives budget proposals and President Biden’s tax framework do not contain such restrictive terms. Therefore, it is an important time to speak to your advisor about the possibility of setting up a grantor trust.
Planning for entrepreneurs
When it comes to what is probably your most valuable asset – your business – tax planning and giving become a little more complex. And if you are considering selling your business, it is important to consult with your advisor in order to schedule the sale at a time when it is in your best interests to do so. For example, if higher income tax rates are possible, selling shares in a business can help lower taxes by selling the property in installments compared to selling the property as a whole.
One last word
Don’t let the twists and turns of an uncertain tax horizon jeopardize your carefully crafted wealth plan. Talk to your advisors about whether or not you should implement some advanced planning strategies to ensure you take advantage of this year’s opportunities while staying prepared for the future.
Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation
This article is for informational purposes only and is not intended as an offer or solicitation to sell any financial product or service, or as a determination that any investment strategy is suitable for any particular investor. Investors should seek advice on the suitability of an investment strategy based on their goals, financial situation and particular needs. This article is not intended or intended to provide financial, tax, legal, accounting, or other professional advice, as such advice always requires consideration of individual circumstances. If professional advice is required, the services of a professional advisor should be sought.
This article is written by our contributing advisor and represents the views, not the Kiplinger editors. You can review the advisor’s records with the SEC or FINRA.
Chief Wealth Strategist, Wilmington Trust
Alvina Lo is responsible for strategic wealth planning at Wilmington Trust, part of M&T Bank. Alvina’s previous experience includes positions at Citi Private Bank, Credit Suisse Private Wealth and as a practicing attorney at Milbank, Tweed, Hadley & McCloy, LLC. She holds a BS in Civil Engineering from the University of Virginia and a JD from the University of Pennsylvania. She is a published author, frequent lecturer, and has been quoted in major media such as the New York Times.