If there’s one thing that’s important to know about year-end planning, it’s to be proactive right now. With legislative changes hovering dangerously close, and with no one really knowing what the final budget 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 will also be prepared for what may transpire over the next few months.
This is year-end planning with a twist: Do what you would normally do, but if you believe tax laws will change, then be ready to do something different.
For example, some of the traditional, tried-and-true, routine year-end planning strategies include deferring income to next year and maximizing deductions for this year. This would decrease the overall current tax bill for calendar year 2021. The twist here is that if income tax rates go up, whether because of tax law changes or you expect to have higher income next year, you will want to do the opposite — recognize income this year and defer deductions to next year. This may result in you accelerating income through strategies such as taking more in required minimum distributions from retirement accounts, doing a Roth IRA conversion, or harvesting capital gains to realize more income this year.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In terms of deferring deductions, you may want to wait until 2022 to make sizable charitable donations, because a charitable deduction at a higher tax rate next year could be “worth” more from a tax perspective than one in this year at a lower tax rate. Other deductible expenses, such as medical and certain interest expenses, may be better if taken in 2022.
All of this would be bucking conventional wisdom. The challenge here is that it is unclear whether rates will go up, and if so, at what level and how much. As of the time of this writing, the previously proposed increases in ordinary income tax rates and capital gains taxes are no longer in the latest legislative proposal. Instead, there is now a proposed surcharge for individuals with income over $10 million and trusts with income over $200,000. That said, it is prudent to keep in mind that all previously proposed increases may still be possible as negotiations continue.
Let’s take a look at some other strategies you may want to consider.
High-net-worth and ultra-high-net-worth individuals need to give now
If your assets are significant enough to constitute a taxable estate, year-end planning has even more significance. For 2021, the amount exempt from federal gift and estate tax is $11.7 million per person, which means that you may give this amount during your lifetime, free of gift tax, with any unused amount applied against federal estate taxes at your death. Under current law this exemption amount is scheduled to sunset on Dec. 31, 2025. However, there is a very strong possibility that legislation may be enacted earlier that may abruptly, and potentially dramatically, reduce the exemption. Previous proposals have suggested the date may be as early as Jan. 1, 2022.
If you are considering making a substantial lifetime gift, now is the time. Although we don’t know for certain what the new tax laws may look like, chances are they are not going to get any better for high-net-worth taxpayers. Don’t lose the chance to take advantage of some very beneficial wealth-transfer opportunities this high exemption allows.
Take advantage of trusts
Gone are the days of your grandfather’s trust, which operated as an immovable 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 with transparency, and over multiple generations.
Utilizing 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 trusts effectively allow the trust assets to grow income-tax-free, as all income tax obligations are paid by the grantor. The grantor trust structure also benefits the grantor in that all payments for taxes further reduce the taxable estate yet are not subject to gift tax.
Although there have been numerous legislative proposals this past year that, if passed, would have severely limited the effectiveness of this strategy, the latest round of budget proposals from the House of Representatives and President’s Biden’s tax framework do not contain such restrictive terms. Therefore, it is an important time to speak with your advisers about the possibility of establishing a grantor trust.
Planning for business owners
When it comes to what is likely your most valuable asset — your business — tax planning and gifting become a bit more complex. And, if you are contemplating selling your business, it’s critical to consult with your advisers to time the sale when it’s in your best interest to do so. For example, with higher income tax rates possible, selling business interests may help reduce tax by selling ownership in installments, versus selling as a whole.
A final word
Don’t let the twists and turns of an uncertain tax horizon threaten your carefully constructed wealth plan. Speak with your advisers about whether or not you should implement some advanced planning strategies to be sure you are utilizing 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 as an offer or solicitation for the sale of any financial product or service or as a determination that any 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 situations and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional adviser should be sought.
-
A Lesson From the School of Rock About the MarketsIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I retired at 65 with $7.8 million and feel like I over-saved. My 40-something son is on the same path. Should I tell him to reconsider?We ask financial experts for advice.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and Around
It's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
