Crowe LLP has released its
The guide, released last month, offers an overview of some of the main tax provisions in recent legislation, such as the American Rescue Plan Act that was passed in March and the Consolidated Appropriations Act that Congress passed last December. The recently passed bipartisan infrastructure bill included a number of tax provisions, such as cryptocurrency reporting and an early end to the Employee Retention Credit (
“From an estate and gift perspective, even though the reduction in the exclusion is now not a part of the bill, it is scheduled to be reduced from $11.7 million currently per person to $5 million per person, indexed for inflation, come Jan. 1, 2026,” said Sally Day, a managing director at Crowe who leads the Florida private client services group. “So even though there is maybe no urgency to utilize your credit through lifetime gifts before Jan. 1, 2022, it still makes sense to move forward with those plans and not delay because it eventually is set to revert back to the lower amount. We’re encouraging clients that if it made sense before the changes to the Build Back Better bill that removed this immediate drop, it still makes sense to proceed with those plans.”
The guide includes advice on income taxes and deductions, including timing income and expenses, the effects of the Tax Cuts and Jobs Act of 2017 on timing, tax-advantaged savings for health care, smaller alternative minimum tax threats, avoiding or reducing the AMT, payroll taxes, self-employment taxes, the additional 0.9% Medicare tax, owner-employees and estimated tax payments and withholding. For investors, the guide offers advice on capital gains taxes and timing, being tax-smart with losses, the wash-sale rule, mutual funds, small business stock, passive activities, income investments, the 3.8% net investment income tax (NIIT) and investment interest expense. Estate-planning advice includes tips on the estate tax, gift tax, generation-skipping transfer (GST) tax, state taxes, exemption portability, tax-smart giving and trusts.
There were originally proposals from the Biden administration and Democrats on the House Ways and Means Committee to effectively raise capital gains and estate taxes for the wealthy in the Build Back Better Act, but those seem to have largely dropped out of the bill passed by the House after pressure from moderates like Sen. Joe Manchin, D-West Virginia, and Kyrsten Sinema, D-Arizona. But that doesn’t mean that tax clients shouldn’t do some tax planning.
Under the TCJA, a large number of personal tax breaks are scheduled to expire at the end of 2025. Until Congress extends them or makes other changes, it makes sense to plan ahead with those scheduled expirations in mind.
“It makes tax planning very difficult when there’s still so much in flux and obviously things can still change as this moves through the Senate,” said Sarah Allen-Anthony, global private client service managing partner at Crowe. “There are some increases to tax for individuals that are maybe a little less obvious than the rates, such as expanding that 3.8% net investment income tax, as well as permanently disallowing the excess business losses. A lot of our clients that own S corporations and partnerships that are taking advantage or have in the past of the different TCJA provisions such as bonus depreciation, resulting in losses from those businesses, the way that works currently is even if it’s limited in one year, you get it the next year. The most recent proposal is to have a permanent disallowance on those excess business losses under Section 461(l), which would really be quite impactful to how taxpayers think about elections and accounting methods and depreciation, and a lot of those items that are timing of income and deductions.”
The guide also provides advice on retirement planning, including retirement plan contributions, Roth IRA conversions, early withdrawals, leaving a job and required minimum distributions. The latest
“Certainly maximizing retirement contributions and those sort of things on the itemized deductions side, I think there’s a lot going on there, because they have the larger standard deduction,” said Allen-Anthony. “But the most recent bill or manager’s edit to that would temporarily increase the state and local tax deduction, which obviously has been a much talked about item relative to the SALT cap. I do think there’s an opportunity for year-end planning for individuals relative to charitable deductions, state and local tax, if they make their fourth quarter state payment in December or January, depending on where we land on that SALT cap, as well as bunching or deciding what year they make their charitable contributions, and then depending on how close they are to the standard [deduction] to get over that hump to be able to itemize. That’s definitely a thing that individuals can do prior to year end to maximize their tax position.”
Congress is also allowing taxpayers who don’t itemize to claim charitable contributions of up to $300 for individuals and $600 for married couples who file jointly. “To the extent that you don’t itemize and you take the standard deduction, then married filing joint couples can deduct $600 of charitables above the line,” said Allen-Anthony. “If you do itemize, the limit for cash contributions you can deduct is up to 100% of AGI for 2021. That was in the CARES Act. The increase used to be 50%, then it went to 60%, and for 2020 and 2021 it’s 100% to the extent you’re donating cash. One of the things we’re talking to our clients about is considering donating appreciated stocks. With the market as it is, it has a lower percentage limit of 30% of AGI, but then you don’t pay tax on the gain and you get the fair market value deduction, so it’s a bigger benefit.”
Many traditional tax-planning strategies are still available. “If you have clients that are charitably inclined, the charitable remainder trusts are still an excellent vehicle to accomplish charitable goals for clients, and it does take some time to get those set up,” said Day. “With the higher tax rates in the future that are looming over us, it may make sense for individuals to do some Roth conversions and opt to pay taxes now to convert their traditional IRA into a Roth. We get a lot of questions from clients about whether they should make a conversion. Along with that, just traditional types of tax planning ideas, like capital gains harvesting, maybe selling closely held stock and look at whether there’s value in doing an installment sale as opposed to recognizing all the gain upfront, and how to smooth out income from year to year so that you don’t have spikes where you’ve got a lot of income in one year that pushes you up into the next bracket and then you’re back down the following year and looking at ways to sort of smooth that out in a tax efficient way.”
Income smoothing will be especially important for wealthy clients if the Build Back Better Act passes. “There are some proposals for surtaxes on adjusted gross income that exceeds $10 million and then 5% on that and then an additional 3% to the extent it exceeds $25 million,” said Allen-Anthony. “That could obviously be very impactful to the extent there’s a large event in a year and figuring out if there’s a way to spread that so that you’re not over those thresholds.”
“Those are the thresholds for individuals, but when you look at trusts and estates, that 5% surcharge applies to income at $200,000, and the upper limit is not $25 million, it’s $500,000,” Day noted.
The infrastructure bill included requirements for information reporting by cryptocurrency brokers of transactions, which may prompt taxpayers to start reporting their gains on trades of Bitcoin, Ether and other digital currencies, as the IRS has been asking them to do in recent years by including a question on the front page of the tax form. “We’ve had clients in the past who never realized that they needed to report their cryptocurrency activity on their tax return,” said Day. “It’s a matter of education to make sure our clients understand that there is at least information reporting and that they need to be tracking their basis in their cryptocurrency just like they would for any other stock or bonds that they might own.”
Whatever tax-planning advice accountants give to their clients, they should also counsel patience with the IRS.
“I think the piece of advice that I would have is the IRS is still scrambling, obviously, to catch up,” said Nicole Bencik, managing partner of tax at Crowe. “They shut down like the rest of the world and especially with paper filings, for instance, we’re seeing quite a bit of influx of notices of misfiling, even though you probably properly filed, but they just haven’t gotten around to it and their computer systems aren’t up to date just yet. And so my biggest piece of advice is try to get the information in sooner rather than later to get those tax returns filed, especially those that are continuing to paper file because I think it’s going to take the IRS a little bit more time to be able to catch up. The sooner you can get it in, the better. And don’t be alarmed by some of the notices because they may just be that because the IRS hasn’t caught up. Their computer systems haven’t been updated, so we’re seeing an influx of that. I would plan accordingly from that perspective.”
“Even though the IRS gets a large percent right, we’re the ones that have to deal with the challenges and problems that we all have to try to help taxpayers or help your clients get through,” said National Taxpayer Advocate Erin Collins, who leads the Taxpayer Advocate Service at the IRS, during an online meeting Monday of the AICPA’s Tax Division. “Since I joined in March of 1999, filing season has become the number one focus for the IRS, for taxpayers, for practitioners. We used to talk about exam issues and appeals and all sorts of other things going on. But I think right now between the filing season, collections, and a lot of the ‘oopses’ that have occurred, that has really taken the attention of most of our taxpayers as well as the practitioners and the folks in my office. If you look at a lot of our inventory, a high percentage of our inventory is turning into processing issues. We are not a second IRS. We are there to be the safety net and to help taxpayers with issues and problems. Our job should not be processing tax returns, and unfortunately that is a call we get a lot from taxpayers. They are desperate.”
Tax clients should meet with their accountants before the end of the year to plan accordingly.
“I would encourage taxpayers to the extent that they want to engage in year-end tax planning to get with their CPA sooner rather than later so that we can take a look at where the taxpayers are at year to date and get things teed up for planning once things are finalized because likely there’s not going to be a whole lot of time to get things done that have to be done by 12/31,” said Allen-Anthony. “There are certain things, especially for businesses, that can be done after year-end potentially, like automatic accounting method changes and things of that nature, decisions on bonus depreciation or electing out. But for cash-basis individuals, with the exception of certain things like maybe retirement plan contributions, a lot of things would have to be done by 12/31. A charitable donation needs to be made by 12/31, so starting to tee up looking at things now is going to help to be able to make it possible to get things implemented by the end of the year. I know that estate planning attorneys, valuation experts and such have been busy already.”
Accountants will be busy as well. “We see lots of opportunity with all this volatility and flux in the tax legislation, and we see it as a chance to help our clients maneuver through this,” said Day.
