tax filing

Top Tax Issues to Watch Out for This Year

One major recommendation for all taxpayers is do NOT procrastinate on your 2021 tax return. It’s more important than ever this year.

Tax Day is approaching quicker than you might think, and if you haven’t started to get organized, now is the time – especially with potential legislative changes looming on the horizon.

I sat down with my colleague Jeremiah Barlow, Head of Family Wealth Services at Mercer Advisors, to discuss major tax trends for the 2021 tax season, and what unexpected hurdles to watch out for with the proposed Build Back Better Act in 2022.

Q: At a high level, what are the main tax issues you expect to be a major focus in 2022?

Jeremiah: From my perspective, there’s a lot of angst about whether the tax changes that were proposed in 2021 – in the Build Back Better Act – will ultimately carry forward into this year. If so, when do they go into effect, and will they be retroactive?

For example, recent interest has been about the timing of Roth conversions of traditional IRAs.  Roth IRAs are popular retirement savings tools, as the growth of the assets and future withdrawals from the account are tax-fee as long as certain criteria are met. There are income limitations on contributions to a Roth IRA, but a strategy known as a “backdoor” Roth conversion can be used if you are over the income limitations.  The Build Back Better Act, if it passes, would put an end to this backdoor option. Although you would normally wait until later in the year to do a conversion, there’s a lot of discussion, from a strategy perspective, about making backdoor Roth contributions early in the year in case the rules change. Individuals are looking to capitalize on their eligibility to do Roth conversions and reap the tax-free growth benefits of the Roth IRA while they still can.

Kara: There was also some discussion of ending 1031 property tax exchanges with the Build Back Better Act, though they aren’t in the version of the bill currently on the table. A 1031 exchange is the swap of one investment property for another that allows capital gains taxes to be deferred. For people who are interested in swapping out for another property and taking advantage of 1031, now is probably the time to do so. Legislators kicked around a number of tax code changes last year, and any number of them could come back into play.

Q: Thinking about families who are preparing to file their 2021 taxes, what do you think will be the major changes from the 2020 filing period?

Jeremiah: If they took advantage of the child tax credit, their refund is likely to be lower than they are used to. Essentially, they would have gotten an acceleration of that refund starting in July 2021 when the child tax credits rolled out.

Kara: That’s really good to note. From my perspective, while it sounds simplistic, many of my clients are talking about getting organized earlier this year. They’re hearing about big delays at the IRS or at the state revenue boards in terms of processing, so they’re eager to file their taxes sooner to minimize the delays in getting their refunds as much as possible.

Jeremiah: I echo that. The tax industry has been hit really hard with the national staffing shortage. There’s a trickle effect to that, and people should be taking advantage of getting ahead now to get their returns completed because there might not be enough time the closer we get to April 15. That’s really important this tax season: Don’t procrastinate.

Q: How do you think the tax sector has changed in the last few years?

Jeremiah: Tax policy has grown increasingly political. Normally, the tax laws change once every 10 years. Now, it’s a constant source of debate, and proposed changes are constantly on the table. We’re looking at the potential for tax policy changes every two years, which can be challenging for even the most sophisticated tax professionals to keep up with – let alone families and individuals who rely on our help to navigate this landscape.

Kara: I agree. I think our clients are definitely feeling that anxiety about the changes. Even things like gifting are becoming more complicated. For example, a client might want to help their child with a down payment on a house, but they aren’t quite ready yet or they want to wait until their child gets married. But because requirements around gifting might change by then, that client may be accelerating their plans, regardless of whether they think their child is ready. Those are the types of conversations I’m seeing from a tax perspective. There seems to be a lot of shifting timelines from people who are concerned about potential tax changes.

Q: As far as taxes in general, what specifically do you think individuals should focus on for the first six months of 2022?

Jeremiah: At the beginning of the year, many people see their salaries go up – which can lead them to debate whether to increase their withholding or use that money elsewhere. If you weren’t already maximizing a 401(k) contribution or any stock allocations you may have, now is a great time to identify the right approach for the year ahead. People always think of tax planning as an end-of-year activity, but you can do just as much at the beginning of the year, especially if you’ve had any employment changes.

Looking ahead for the 2021 tax year specifically, though, the most important steps to take for tax planning include preparing and filing early, as well as understanding what options you have before potential tax law changes come in with the proposed Build Back Better Act. By working with an experienced financial professional, you will be able to understand all of the options available to you during this tax season and reduce your tax burden in 2022.

The CDFA® mark is the property of The Institute for Divorce Financial Analysts, which reserve sole rights to its use, and is used by permission.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment adviser with the SEC. This piece is being provided for informational purposes only and should not be considered specific financial, tax, legal or investment advice and no decisions should be made solely based on this information. Readers are urged to consult with their legal or tax professional regarding their own unique situation. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors.

About the Author

Kara Duckworth, CFP®, CDFA®

Managing Director of Client Experience, Mercer Advisors

Kara Duckworth is the Managing Director of Client Experience at Mercer Advisors and also leads the company’s InvestHERs program, focused on providing financial planning to serve the specific needs of women. She is a CERTIFIED FINANCIAL PLANNER and Certified Divorce Financial Analyst®. She is a frequent public speaker on financial planning topics and has been quoted in numerous industry publications.

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