Having access to
This article is a highlight of our 2021 year-end tax briefing; our full briefing includes additional information on topics such as delaying / reducing income and gains, need rates, maximizing deductions, energy credits, corporate AMT, depreciation and expensing, research and development expenses, international tax, and other year-end tax planning strategies. Read and download the full
Planning Strategies and Techniques Available Through End of Year
As the world continues to recover from the depths of the COVID-19 pandemic, the economy has begun a slow return to normalcy. Throughout 2021, businesses in the United States gradually opened up and total lockdowns became a thing of the past as case numbers subsided and vaccines became available. However, as the end of 2021 approaches, things are not yet completely back to normal. Pockets of the country are still dealing with elevated COVID-19 cases, supply chains continue to be disrupted, and labor shortages exist throughout the country as people are hesitant to return to work.
This year saw President Joe Biden sworn into office in January, bringing a new set of policies, priorities, and initiatives. Biden, along with a Democratic-controlled Congress, took steps early in the year to battle the COVID-19 crisis and assist lower and middle-income families dealing with the pandemic with the passage of the American Rescue Plan Act (ARPA). However, not all of the Democratic priorities were immediately handled in that initial piece of legislation, and more steps were deemed necessary. At the time of this publication, the Build Back Better Act is under consideration in Congress, with the expectation that it will become law by the end of 2021, bringing with it a slew of additional tax changes.
In the years after the Tax Cuts and Jobs Act (TCJA), year-end tax planning was generally a pretty simple manner of minimizing income, deferring it when possible, and maximizing deductions. The last two years, driven largely by the ongoing pandemic, has made tax planning a little more difficult. Massive tax changes affected nearly every type of taxpayer. Also, a change in the political makeup of the government means that the simple rules of 2018 and 2019 must be altered, with a new plan of action put in place.
As the last two years have seen so much change, both from a tax and a non-tax perspective, it is important to make sure clients have the best possible information on which to base decisions. As more change is expected in the coming months, it is essential to provide clients with solid planning advice to ensure these businesses and families thrive in the aftermath of whatever comes down the road.
Legislation
When President Biden was campaigning in 2020, he promised to provide a huge increase in social spending, with more robust health, education, and welfare programs meant to improve the quality of life for lower and middle-income voters. These programs were to be paid for with tax increases on higher-income taxpayers, with a specific promise that no one making less than $400,000 would see a tax increase. Both ordinary income and capital gains tax rates were to be increased. Additionally, an increase in the corporate tax rate would help fund the huge spending initiatives.
As the passage of the Build Back Better Act approaches, it appears the thresholds for tax increases will be considerably higher than planned, as will be discussed below. Additionally, there does not seem to be a simple increase in the corporate tax rate on the horizon. Nevertheless, steps can be taken in the last weeks of 2021 to minimize the impact of the Build Back Better Act.
Given the slim majorities Democrats hold in Congress, and the fact that passage in the Senate will require use of budget reconciliation rules in the face of unified GOP opposition, this may well be the only significant tax legislation Democrats can pass before the mid-term elections in 2022. Thus, what is in this bill will be important for year-end planning in 2021 and overall planning for 2022.
Minimizing Individual Taxes
Income Taxes
The key to any year-end planning strategy is to minimize taxes. This is generally done by either reducing the amount of income received or increasing the amount of deductions.
However, for some individual taxpayers, this may not be the best advice for the end of this year. The current version of the Build Back Better Act under consideration in Congress imposes a new income tax surcharge on the highest-income taxpayers. An additional tax of five percent applies to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $10 million ($5 million for a married taxpayer filing separately, $200,000 for an estate and trust). An additional three percent tax applies to the modified adjusted gross income of a joint filer, single filer, or head of household in excess of $25 million ($12.5 million for a married taxpayer filing separately, $500,000 for an estate and trust). The surcharge would apply in tax years beginning after 2021.
Therefore, for taxpayers with incomes anticipated to exceed these thresholds in 2022, it may be wiser to accelerate income to 2021 as much as possible. This could take the form of paying early bonuses or distributing more income from pass-through entities in 2021.
For taxpayers whose income does not exceed these thresholds, the planning advice should take the standard form of deferring income to 2022 where possible, as it is unlikely there will be additional legislation increasing taxes in 2022.
Valuable resources such as this are only part of what is included in Wolters Kluwer’s free year-end tax planning resource kit.
