The end of the year always means the possibility of last-minute tax changes, and this year, that’s especially true. Here are some tax tips to help with your 2021 taxes.
New legislation may mean major changes starting this year in 2022. However, other proposed bills, such
as new capital gains and qualified dividend tax rates, may take effect retroactively. And it’s possible that
taxes on the wealthy may go up as well. These possibilities may make it difficult to plan with certainty. Specific provisions under consideration are discussed here and these 2021 tax tips should help. However, keep in mind that if passed, these provisions are likely to be subject to certain exclusions and dollar limits.
Provisions Under Consideration
- Increasing the top ordinary income tax rate from 37% to 39.6%, which was the rate prior to the passage of the Tax Cuts and Jobs Act of 2017.
- Increasing the long-term capital gains and qualified dividend rate from 20% to 39.6% for taxpayers with annual adjusted gross income of more than $1 million.
- Changing the capital gains tax to:
- Tax capital gains when assets are gifted or transferred to people at death.
- Tax capital gains when assets are transferred to or from an irrevocable trust or
- Tax capital gains on unrealized appreciation of assets held in trust if capital gains have not been paid on a property for 90 years (e.g., property in a generation-skipping trust).
- Tax carried interests as ordinary income instead of capital gains.
- Subjecting pass-through income to either the 3.8% Medicare tax or the 15.3% self-employment tax if taxable income is greater than $400,000.
- Repealing the Section 1031 like-kind exchange rules for real estate so that investors cannot defer taxes by rolling profits from the sale of a property into their next purchased property.
More from Capitol Hill
Here are changes that should be considered as part of 2021 year-end tax planning. In addition, at least
two other tax topics still might be included in a final bill: (1) a change in the $10,000 state and local
income tax and (2) an increase in the estate and gift tax rate. (However, the $11.7 million allowance is
scheduled to sunset on Dec. 31, 2025, unless it is extended.)
Debate around all these provisions is ongoing, but prudent taxpayers should become familiar with how
they can change business and estate plans going forward.
Six Proactive Measures for the 2021 Tax Tips
Here are six more 2021 tax tips that can result in lower taxes should these changes in the tax code be enacted:
- Transfer any appreciated assets you were planning to transfer by the end of 2021. Waiting until
2022 may expose these gifts to a capital gains tax. This is a good idea even for transfers to a
spouse, revocable trust, not for profit, small business or family farm because we do not yet know
whether transfers to any or all of these entities will be excluded from taxation.
- Review any estate tax planning strategies involving irrevocable trusts or partnerships to assess
whether a capital gains tax may be triggered on appreciated assets to be contributed or
distributed in the future.
- Consider selling investment real estate and buying new property in 2021. This may help avoid
triggering taxes if the Section 1031 exchange rules change.
- Maximize contributions to retirement plans. Be aware that backdoor Roth IRAs may be eliminated
- Cash out any carried interest positions.
- If you’re thinking about selling a business in 2022, consider doing so in 2021 instead, before there
is a change in the capital gains rate. The proposed capital gains rate is nearly double the current
rate, which means you would nearly double the amount of tax paid on the sale.
Keep in mind that the situation is changing rapidly, and your best bet is to keep in close touch with