Newburg | CPA Tax Brief (11/19/2021)
As the year-end approaches and we look forward to 2022, individuals should be reviewing their situations to identify any opportunities for reducing, deferring, or accelerating tax obligations. Specifically, taxpayers should be considering the tax reform provisions that remain and that are expiring from the CARES and SECURE Acts as well as new opportunities stemming from the American Rescue Plan Act.
We are currently reaching out to clients to highlight what to expect for tax season 2022 and take advantage of any year end opportunities. Any discussions surrounding 2021 year-end tax planning should also involve a discussion about the recently signed Infrastructure Investment and Jobs Act as well as the proposed Build Back Better Act currently making its way through Congress and how these will impact potential 2022 tax planning. Below we have highlighted some of the top things to consider when planning.
Individual Tax Planning Overview
American Rescue Plan Act considerations for 2021:
Economic Impact Payments (EIPs)
Similar to the 2020 stimulus payments, the EIPs were setup as advance payments of a recovery rebate credit. If you qualified based on your previously filed tax return, you should have received these payments already. However, if you did not receive the full payment owed to you, this additional amount will be claimed on your 2021 income tax return (we can assist in determining any additional amounts owed to you and ensure you capture the full credit). When providing your tax information, you will be asked to list any of these payments received in 2021 so that we can evaluate your eligibility for any potential credit.
Child Tax Credit
Changes to the child tax credit in 2021 included:
- The amount of the credit increased for certain taxpayers.
- The credit is now fully refundable.
- The credit is applicable to children aged 17 and younger.
- Qualifying taxpayers were issued advance monthly payments totaling half of their anticipated 2021 child tax credit (the other half will be claimed on your 2021 tax return). Note, if you received advance monthly payments, the tax credit on your 2021 tax return will be reduced by the total you already received from the IRS.
- Please gather the amount of payments received with your 2021 tax return information.
Charitable Contribution Deductions
- Individuals who do not itemize their deductions can take an “above-the-line” charitable deduction of up to $300 ($600 for joint filers). Such contributions need to be made in cash and made to qualified charitable organizations.
- Taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%).
- One powerful tax consideration depending on your future charitable intentions is to consider donating appreciated stock directly to a qualified charitable organization. This approach avoids future capital gains tax while also providing you a charitable deduction to reduce your tax burden. This can be completed by using a Donor Advised Fund (DAF), direct donation to charities, or by donations through private foundations/ charities
Required Minimum Distributions (RMDs)
You must take Required Minimum Distributions (RMDs) in 2021 if you are age 72 by the end of the year (or age 70 ½ if you reach that age prior to January 1, 2020). The ability to waive RMDs pertained only to 2020.
However, you may be eligible to make a Qualified Charitable Distribution in 2021. This allows you to transfer up to $100,000 from your IRA Required Minimum Distributions (RMD) directly to a qualified charity. This strategy lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability regardless of if you itemize or take the new standard deductions for 2021. We would be happy to review with you in more detail if you have any questions.
Currently there is not a partial exclusion of unemployment compensation from income. The $10,200 exclusion taxpayers received on unemployment compensation in 2020 is no longer available in 2021.
Current rates and deductions for 2021 – ** note these are based on current law
2021 Federal Income Tax Rate Brackets**
|2021 Tax Rate||For Single Filers||For Married Individuals Filing Joint Returns||For Heads of Households|
|10%||Up to $9,950||Up to $19,900||Up to $14,200|
|12%||$9,951 to $40,525||$19,901 to $81,050||$14,201 to $54,200|
|22%||$40,526 to $86,375||$81,051 to $172,750||$54,201 to $86,350|
|24%||$86,376 to $164,925||$172,751 to $329,850||$86,351 to $164,900|
|32%||$164,926 to $209,425||$329,851 to $418,850||$164,901 to $209,400|
|35%||$209,426 to $523,600||$418,851 to $628,300||$209,401 to $523,600|
|37%||$523,601 or more||$628,301 or more||$523,601 or more|
2021 Standard Deduction**
|Filing Status||Deduction Amount|
|Married Filing Jointly||$25,100|
|Head of Household||$18,800|
2021 Long-Term Capital Gains**
|2021 Tax Rate||For Unmarried Individuals, Taxable Income Over||For Married Individuals Filing Joint Returns, Taxable Income Over||For Heads of Households, Taxable Income Over|
Investment income considerations
Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains:
- Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate.
- Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones.
- Investing in, and holding, “qualified small business stock” for at least five years. (Note that the November 3 draft of the Build Back Better Act would limit the 100% and 75% exclusion available for the sale of qualified small business stock for dispositions after September 13, 2021.)
- Donating appreciated property to a qualified charity to avoid long term capital gains tax (also see Charitable Contributions, below).
Net Investment Income Tax
An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. For 2021, net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.
The November 3 version of the Build Back Better Act would broaden the application of the NIIT. Under the proposed legislation, the NIIT would apply to all income earned by high income taxpayers unless such income is otherwise subject to self-employment or payroll tax. For example, high income pass-through entity owners would be subject to the NIIT on their distributive share income and gain that is not subject to self-employment tax. In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider the following tax planning to minimize their NIIT liabilities:
- Deferring net investment income for the year.
- Accelerating into 2021 income from pass-through entities that would be subject to the expanded definition of net investment income under the proposed tax legislation.
State & Local Taxes
- As a result of the pandemic, more people are working from home. This can cause state tax issues and additional state filing requirements. With any additional state filings, be aware of potential credits for taxes paid in other states.
- The Federal deduction for state income and property taxes paid (on Schedule A – Itemized Deductions) is still capped at $10,000 for 2021 ($5,000 for married taxpayers filing separately).
- The November 3 draft of the Build Back Better Act would extend the TCJA SALT deduction limitation through 2031 and increase the deduction limitation amount to $72,500 ($32,250 for estates, trusts and married individuals filing separately). An amendment currently on the table proposes increasing the deduction limitation amount to $80,000 ($40,000 for estates, trusts and married individuals filing separately). The proposal would be effective for taxable years beginning after December 31, 2020, therefore applying to the 2021 calendar year.
Cryptocurrency & Virtual Currency Transactions
- With virtual currency transactions becoming more common, this area is becoming more heavily scrutinized by the IRS.
- The sale or exchange of virtual currencies and the use of virtual currencies to pay for goods or services will likely have tax consequences. It is recommended taxpayers keep track of any such transactions and consult with their tax advisor to determine any reporting requirements.
Retirement Planning & Contributions
Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer’s age.
- The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions). For 2022, these limits are $20,500 and $27,000, respectively.
- The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
- Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
- The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72.
- Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA.
- The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
- Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2021 is $58,000. The maximum SEP contribution for 2022 is $61,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).
- 2021 could be the final opportunity to convert non-Roth after-tax savings in qualified plans and IRAs to Roth accounts if legislation passes in its current form. Proposed legislation would prohibit all taxpayers from funding Roth IRAs or designated Roth accounts with after-tax contributions starting in 2022, and high-income taxpayers from converting retirement accounts attributable to pre-tax or deductible contributions to Roths starting in 2032.
- Proposed legislation would require wealthy savers of all ages to substantially draw down retirement balances that exceed $10 million after December 31, 2028, with potential income tax payments on the distributions. As account balances approach the mandatory distribution level, extra consideration should be given before making an annual contribution.
Estate & Gift Taxes
- The 2021 estate tax exemption is $11.7 million. Note that the increase in the exemption amount is temporary and it has been proposed to reduce in future years.
- The 2021 gift tax annual exclusion is $15,000 ($30,000 for married couples).
- The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:
- Making annual exclusion gifts.
- Making larger gifts to the next generation, either outright or in trust.
- Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).
Net Operating Losses
- The CARES Act had provided for a special 5-year carryback of Net Operating Losses for taxable years beginning in 2018, 2019 and 2020. This special carryback rule no longer applies for 2021.
- For losses arising in taxable years beginning after December 31, 2020, the net operating loss deduction is limited to 80% of the excess (if any) of taxable income.
Excess Business Loss Limitation
- A non-corporate taxpayer may deduct net business losses of up to $262,000 ($524,000 for joint filers) in 2021. The limitation is $270,000 ($540,000 for joint filers) for 2022. The November 3 draft of the Build Back Better Act would make permanent the excess business loss provisions originally set to expire December 31, 2025. The proposed legislation would limit excess business losses to $500,000 for joint fliers ($250,000 for all other taxpayers) and treat any excess as a deduction attributable to a taxpayer’s trades or businesses when computing excess business loss in the subsequent year.
2021 Tax Return Due Dates
Tax Return due dates had been changed the past two years as a result of the Pandemic, however, the 2021 due dates are as follows (no changes to date):
- Form 1040 – due April 15, 2022 (extension available to October 15, 2022)
- FinCEN Form 114 (foreign bank reporting) – due April 15, 2022 (extension available to October 15, 2022)
- Form 1041 – due April 15, 2022 (extension available to September 30, 2022)