Most years, Thanksgiving brings family celebrations, get togethers, turkey and a reminder to dust off the tried-and-true income tax planning checklist. Those checklists typically look to defer income to future years and to accelerate year-end expenses for deduction this year. We may look to see if we can take steps to maximize income at the low tax bracket amounts, pay bonuses, trigger tax recognition events such as sales or transfers and consider how much and what to pay for business expenses. We may seek to defer income when possible to pay tax in a later year.

We then consider possible itemized deductions, if appropriate. We consider when to pay medical expenses, property taxes, and charitable contributions, perhaps bunching together with the much higher standard deduction and loss of the state and local tax deduction in 2021.

However, the winds of change are upon us once again. If we believe that tax rates will increase and other deductions become available, what are we to do? The historic planning steps taken in years past may actually now trigger a higher and not lower income tax liability.

Legislative changes are dangerously close to reality and, more importantly, we really do not know what the final tax bill will say or do. That said, the Democratic party’s theme is to raise payroll taxes on high earners, increase marginal income tax rate on high income (those over $450,000 income) individuals and increase the capital gains tax rates on high income individuals. Estate and wealth taxes are expected to increase along with higher corporate income tax rates.

Note also that the Wash Sale rules do not yet apply to cryptocurrency. The Wash Sale rules may preclude taxable loss on a position that is sold which is replaced or repurchased within a short period of time. Clients with loss positions in cryptocurrency, which is very volatile, may wish to take advantage of this loophole. Note, that this loophole is expected to close in 2022.

If tax rates rise, then the historic tax planning approaches described above would increase your tax burden. Perhaps we should recognize income this year and not in the future. Take more than the required minimum distribution from retirement accounts. Consider Roth IRA conversions. Harvest capital gains this year and maybe even defer capital losses.

High net worth and ultra-high net worth individuals should consider gifting appreciated assets. These gifts may avoid tax on the gain and provide a deduction equal to the fair market value of the contribution against income. Savvy taxpayers will use Trusts or similar devices to help charity and to provide tax efficient streams of income.

Consider Charitable Trusts such as Charitable Remainder Trusts (CRTs) or Charitable Lead Trusts (CLTs). The CRT provides for the charitable component to be paid at the end of the charitable term. As a result, the overall charitable deduction is lower than other alternatives. However, the sale of an appreciated asset that is contributed to the CRT is not taxable. A CLT provides for the charitable component to be paid at the beginning. As a result, the charitable deduction is typically larger and often in an amount equal to 100% of the value of the asset contributed. However, the CLT is usually a Grantor trust and the sale of an asset contributed to the CLT is still subject to tax. These are general rules and each type of trust should be carefully analyzed and the trust itself designed with your specifics. An often-overlooked alternative is the Pooled Income Fund (PIF). The PIF, when properly designed, will provide a substantially greater income tax deduction than a CRT. The PIF can hold real property and is not subject to the unrelated business taxable income (UBTI) rules. (The CRT is subject to those rules limiting investment decisions.) With a PIF, the client can maintain complete control and can receive all income for life or even on a multi-generational basis. See our comparison chart for the salient advantages of each. Don’t simply pick a technique, tool or strategy, focus first on the family’s long-term goals and design the appropriate plan.

The state and local tax deduction may return in 2022. Perhaps pay your property tax in January 2022 and not in December 2021 to deduct those payments in 2022. The same payment is not deductible in 2021.

If you are selling your business, or appreciated assets, you may need to move quickly if you believe rates will rise. If rates are rising, would we rather pay the tax now than use an installment sale to push the tax liability to future years?

Changes may also be coming to the estate and gift taxes. We should continue gifting if needed to fall below the lifetime estate tax exemption of $11,700,000. Note that if legislative gridlock continues and no estate tax changes are enacted, the $11,7000,000 falls to $5,000,000 adjusted for inflation (about $6 million now) on January 1, 2026. Careful planning should begin immediately for persons concerned about the increased estate tax liability.

Be the first to comment!
Post a Comment