Year-end tax planning takes a turn in 2021
If there’s one thing that’s important to know about year-end planning, it’s to be proactive now. As legislative changes approach dangerously and no one really knows what the final money bill will look like, planning early is essential. Even if nothing changes, which is unlikely, you will still have a solid plan in place and be prepared for what might happen over the next few months as well.
This is year-end planning with a twist: do what you normally would, but if you think tax laws are going to change, then be ready to do something different.
For example, some of the traditional and proven year-end planning strategies include deferring income to the next year and maximizing deductions for that year. This would reduce the current overall tax bill for the 2021 calendar year. The problem here is if income tax rates go up, either because of changes in tax laws or if you plan to have income. higher next year, you’ll want to do the opposite – recognize income this year and defer deductions until next year. This may lead you to accelerate your income through strategies such as increasing the minimum required distributions from retirement accounts, converting Roth IRAs, or harvesting capital gains to make more income this year.
In terms of deferring deductions, you might want to wait until 2022 to make large charitable donations, as a charitable deduction at a higher tax rate next year could be “worth” more than one. tax perspective than a deduction this year at a lower tax rate. . Other deductible expenses, such as medical bills and some interest charges, might be better if taken in 2022.
All of this would go against conventional wisdom. The challenge here is that it is not clear whether rates will increase, and if so, to what level and by how much. As of this writing, the previously proposed increases to ordinary income tax rates and capital gains taxes are no longer included in the latest legislative proposal. Instead, a surtax is now proposed for individuals with income over $ 10 million and trusts with income over $ 200,000. That said, it’s safe to keep in mind that all of the previously proposed increases may still be possible as negotiations continue.
Let’s take a look at some other strategies you might want to consider.
High net worth and very high net worth individuals should donate now
If your assets are large enough to constitute a taxable estate, year-end planning matters even more. For 2021, the amount exempt from federal gift and inheritance tax is $ 11.7 million per person, which means you can donate this amount while you are alive, without gift tax, any unused amount. being applied to federal estate taxes upon your death. Under current law, this exemption amount is expected to expire on December 31, 2025. However, there is a very strong possibility that legislation will be enacted sooner, which could abruptly, and potentially significantly, reduce the exemption. Previous proposals suggested the date could be as early as January 1, 2022.
If you are thinking of making a substantial lifelong donation, now is the time. While we are not sure what the new tax laws will look like, it is likely that they will not improve for high net worth taxpayers. Do not lose the chance to take advantage of some very advantageous wealth transfer opportunities that this high exemption allows.
Take advantage of trusts
Gone are the days of your grandfather’s trust, which operated like a stationary black box. Today’s modern trusts are built with much more flexibility and can be structured to continue to meet the needs of your family transparently and across generations.
Using your exemption to make larger gifts today to a trust will give your gift more time to grow outside of your estate. In addition to the traditional benefits of a trust, such as professional management, tax mitigation, and creditor protection, you can also structure your trust as a grantor trust. Grantor’s trusts effectively allow the assets of the trust to grow tax-free because all tax obligations are paid by the grantor. The grantor’s trust structure also benefits the grantor as all tax payments further reduce taxable wealth but are not subject to gift tax.
While there have been numerous legislative proposals in the past year that, if passed, would have seriously limited the effectiveness of this strategy, the latest round of House of Representatives budget proposals and President Biden’s fiscal framework do not contain such restrictive terms. It is therefore an important time to discuss with your advisors the possibility of establishing a transferor trust.
Planning for business owners
When it comes to what is probably your most valuable asset – your business – tax planning and giving get a little more complex. And, if you are considering selling your business, it is essential to consult with your advisors to plan the sale when it is in your best interests to do so. For example, with higher tax rates possible, selling commercial interests can help reduce taxes by selling the property in installments, compared to the sale as a whole.
One last word
Don’t let the twists and turns of an uncertain fiscal horizon threaten your carefully crafted wealth plan. Talk to your advisors about whether or not you need to implement advanced planning strategies to ensure that you use this year’s opportunities while staying prepared for what the future may bring.
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 to be an offer or a solicitation for the sale of any financial product or service or to determine that an investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situation and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting or other advice, as such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional counselor should be sought.
Chief Wealth Management Strategist, Wilmington Trust
Alvina Lo is Head of Strategic Wealth Planning at Wilmington Trust, which is part of M&T Bank. Alvina’s previous experience includes positions with Citi Private Bank, Credit Suisse Private Wealth and as a practicing lawyer 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 speaker and has been quoted in major media outlets such as “The New York Times”.