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Private Client Services Year-End Planning

Uncertainty has been a daily companion for the better part of two years for many in today’s society. In the context of tax laws, this is especially true as affluent taxpayers face pending, probable, or predictable tax legislation by year-end. There is growing consensus that tax rates will rise in the future. Although the questions remain to what extent and how much of the burden will imposed by year-end? There are effective tax strategies available for your unique situation, which can be implemented today (pre-legislation) and/or tomorrow (post-legislation) with proper, qualified, professional guidance.

On the Income Side:

For High-Net-Worth Individuals/Investors

  • Consider Loss Harvesting – Maximum deductible net capital loss remains $3,000 for year after offsetting capital gains
  • Be Wary of Wash Sales – When repurchasing the same stock within 30 days of sale across all of your holding’s losses are limited
  • Recognize Capital Gains – Look at unrealized gains before year-end to capture the appreciation in a potentially lower tax year
  • Qualified Small Business Stock Exclusion – Currently, if certain parameters are met, capital gains can be excluded from income under Sec. 1202. Note:  This is currently slated for modification in the proposed reconciliation bill
  • Be Aware of the Preferred Long Term Capital Gain Tax Rates of 0%, 15% and 20% – You can pay lower, preferred tax rates of certain income
  • Net Investment Income Tax (NIIT) RemainsAt this tie, NIIT is here to stay for high AGI taxpayers at the 3.8% level
  • Opportunity Zone Investment Deadline is Dec 31, 2021 – This deadline is for the 5 yr., 10% basis adjustment and gain exclusion before 2026

For Executives/Wage Or Self-Employed Earners

  • Know the Convenience of Employer Rules  – Important rules to review before a big state tax surprise in April.
  • Defer (Until 2022) or Accept (in 2021) Bonuses
  • Maximize Retirement Contributions
    • Review your limitations before year-end especially in light of the Great Resignation (defer tax)
    • Establish and anticipate how to fund Self-employed retirement plans (defer tax)
  • Maximize Flexible and Dependent Care Spending Accounts for 2021 and 2022 
  • Maximize Health Savings Accounts Contributions – If you have a qualified high-deductible health plan
  • Remember to Catch-up Contributions – For those over 50 (retirement) or 55 (FSA/HSA)
  • Revisit Withhholding Elections Before Year-End – Ensure you are sufficiently withheld at the federal and state tax level including other pre-tax elections for 401(k) plans and parking/transportation expenses
  • Monitor Your Self-Employed Income and Plan for Big Ticket Purchases – With 100% bonus depreciation and bigger expense limitations for M&E and capital expenditures, look at your year-end income and factor in QBI deductions as you review future income prospects

For Retirees and Retirement Planning

  • Contribution and Maximize Your Deductible and Nondeductible IRAs – Don’t forget about the $1,000 catch-up for those eligible
  • Take Your RMD – The mandatory requirements are back for those over 72 years of age unless already started
  • Consider Qualified Charitable Distributions – With RMDs back and large standard deductions, you can reduce your AGI up to $100K
  • Revisit Inherited IRA Distribution Requirements – Now you have a maximum 10-year stretch, but it does not need to be equal over the 10 years
  • Consider Roth Conversions – If you are in a lower tax bracket today than you anticipate in the future, it may be time to convert
  • Be Wary of 401(k) Outstanding Loans – In the Great Resignation, you may have an unintended retirement distribution if the loan is not repaid.


On the Deductions Side:

Adjustments and Itemized Deduction Considerations:

Medical

  • The 7.5% of AGI Floor is Permanent for deducting medical expenses. Some over-the-counter medical expenses and menstrual care products are qualified medical expenses for FSAs, HSAs, and medical deductions.

State Taxes –

  • The $10,000 SALT Cap Remain today, stay tuned for adjustments in the reconciliation bill.

Charitable –

  • $300 Above-the-Line Charitable Deduction ($600 for Joint) – Cash contribution adjustment to income for non-itemizers.
  • Be Aware of AGI Limitations on cash contributions (100% of AGI) and 30% AGI limitation for capital gain property
  • Contribute to donor-advised funds – Defer the donation decision to a particular organization while receiving benefit for the donation today (great for appreciated securities).
  • Don’t forget about QCDs in 2021 and 2022.

Other –

  • Disaster Loss – These must occur in a federally-declared disaster area, so review the outstanding insurance claims to enable a deduction.
  • Bunch Your Deductions – Apply bunching strategy on medical, charitable, and mortgage expenses in one year or the other, especially if you are close to itemizing threshold.
  • Itemize on Federal to Receive State Benefit – Often itemizing at the federal level produces a similar benefit on your state filing.
  • Receive State Benefit for Misc. Itemized Deductions Subject to 2% – While the misc. itemized deductions subject to 2% floor is still disallowed at the federal level, few states still permit the deductions when itemizing.

Family Matters –

  • Track Your Advance Child Tax Credit Payments – Welcome increases to the child tax credit calculations started in July, although excess payments are due in April 2022.

Gift, Estates and Family Legacy –

  • Make All Annual Exclusion Gifts – $15,000 per donee/person annual exclusion gifts ($16,000 per donee for 2022)
  • Superfund the 529 Plan – Up to $75,000 per account/donee.
    • Bonus – These plans may provide a state-level tax deduction depending on account owner and state rules.
  • Prepay Tuition and Medical Expenses – These remove assets from your estate and are not taxable gifts or reduce the annual exclusion limits
No action should be taken without advice from a Withum Tax Professional because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities. Reach out to discuss your private client services and individual tax services situation as year-end approaches.
Author: Billy Thomas, CPA | wthomas@withum.com

Year-End Tax Planning

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