Barbara Coats, Tax Principal at Windham Brannon, recently presented at the Insights webinar What to Know for 2021 Year-End Tax Planning, covering a multitude of important highlights to consider as part of your year-end tax planning strategies for 2021. Below includes a summary of key takeaways from the presentation.
- The Infrastructure Investment and Jobs Act was signed into law Nov. 15, 2021. While the bill focuses mostly on public investment in U.S. transportation networks, broadband and public works projects, it does include some tax provisions:
-The Employee Retention Credit (ERC) will be eliminated one quarter earlier than planned, with the credit no longer applying to wages paid after Sept. 30, 2021 (with an exception for recovery start-up businesses established after Feb. 15, 2020, with annual gross receipts less than $1 million).
-Brokers are required to provide information reporting to the Internal Revenue Service (IRS) on digital assets, including cryptocurrencies. - The Build Back Better Act (BBBA) is being debated in Congress but includes several important proposals to change tax rules. If the version of the BBBA passed by the Senate is different than that of the House of Representatives, reconciliation will be needed. Windham Brannon continues to monitor the status of the BBBA, including its provisions and when it could become law. The following summarizes what the tax law changes proposed by the House. These changes impact individuals, corporations, pass-through entities, retirement accounts and International tax.o Individuals:
§ A five percent surtax on modified adjusted gross income (MAGI) over $10 million ($5 million for married filing separately and $200,000 for trusts), and an additional three percent surtax on MAGI over $25 million ($12.5 million for married filing separately, and $500,000 for trusts), effective for tax years after Dec. 31, 2021.
§ A reduction in gain exclusion from the sale of qualified small business stock from 100 percent to 50 percent for most sales after Sept. 13, 2021.
§ An increase cap on the deduction of state and local tax to $80,000 from 2021 through 2030, with a return to the $10,000 in 2031
§ An extension of the child tax credit expansion through 2022.
§ An extension of earned income tax credit eligibility, phase-in rates and amounts through 2022.
o Corporations:
§ A 15 percent minimum tax on corporations with a three-year average annual of GAAP profits exceeding $1 billion, effective for tax years beginning after Dec. 31, 2022. This is the largest revenue raiser in the House version of the bill.
§ A surcharge of one percent on stock buybacks for public companies, effective for repurchases after Dec. 31, 2020. Excluded is stock contributed to retirement accounts and ESOPs.
§ A delay in the requirement to amortize research and development (R&D) expenses over five years, beginning after 2025 instead of after 2021.
o Pass-Through Entities:
§ An expansion of the 3.8 percent net investment income tax to include business income for individuals with MAGI over $400,000 (filing as single), $500,000 (married filing jointly) and any undistributed income of trusts and estates. This is effective for tax years beginning after Dec. 31, 2021.
§ The excess business loss (EBLs) limitation enacted in 2017 Tax Cuts and Jobs Act becomes permanent. This creates a new loss carryforward bucket for EBLs rather than treating them as net operating losses.
o Retirement Accounts:
§ For mega Roth IRAs, there is a forced distribution of 50 percent of retirement plan assets exceeding $10 million and 100 percent if plan assets exceed $20 million. The proposed change is effective for tax years beginning after Dec. 31, 2028.
§ An elimination of the rollover of nontaxable amounts from an IRA to a Roth IRA (also known as back door Roth IRA contributions) after 2021.
§ A limit on IRA contributions when retirement accounts reach $10 million for individuals with income over $400,000 (filing single) or $450,000 (married filing jointly).
§ An elimination of Roth IRA conversions for those with taxable income over $400,000 (filing single) or $450,000 (married filing jointly) and is effective for tax years beginning after Dec. 31, 2031.
o International Tax:
§ Effective after Dec. 31, 2022, the deduction for global intangible low-taxed income (GILTI) would see a reduced deduction to five percent, resulting in a tax rate of 15 percent, calculated on a country-by-country basis.
§ The deduction for qualified business asset investment would also be reduced to five percent.
§ Foreign tax credits would be allowed to be carried forward five to 10 years while disallowing foreign tax credit carrybacks.
- Plan for uncertainty now if BBBA becomes law. There are some practical steps to consider when preparing for whether BBBA is signed into law, including the following:
o Monitor legislation and develop a plan. With the help of your advisor, monitor the progress of tax legislation and determine if any new laws could or will apply to you. You can also prepare an income tax projection for 2021 and 2022 and develop a plan to act between now and the end of year.
o Consider acceleration of income. If you could be affected by a newly enacted surtax, consider an acceleration of ordinary income and capital gain income into 2021, or for business owners, a delay in deductions until 2022.
o Consider one last chance for back door Roth IRA conversions. Taxpayers may effectively avoid income limits on Roth IRA contributions by making a nondeductible contribution to a traditional IRA and then converting to a Roth IRA before Dec. 31, 2021.
o Remember to pay any deferred payroll taxes. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to delay payment of employer portions of Social Security tax otherwise due between March 27, 2020, and Dec. 31, 2020. Fifty percent of the deferred tax is due Dec. 31, 2021, and 50 percent is then due Dec. 31, 2022. Failure to pay these amounts when due will trigger a penalty on the entire deferred amount.
o Rules for net operating loss (NOL) carryovers change for 2021. For 2021 and future years, NOLs can be carried forward only and can only offset 80 percent of taxable income.
o Maximize the use of zero percent capital gains rate. Capital gains are taxed at zero percent for taxpayers with taxable income not greater than the two lowest brackets, meaning such taxpayers can consider realized capital gains without paying federal tax. Care should be taken to determine the state tax impact before making a sale. Also, investments can be repurchased (no waiting period) to reset the basis, minimizing tax on future gains.
o Required minimum IRA distributions are back for 2021. The one-year vacation from making required minimum IRA distributions in 2020 is over, and they are required for 2021.
o Super philanthropists have one more chance to take advantage of the 100 percent deduction limit. The CARES Act increased the limit for charitable donations to 100 percent of adjusted gross income for 2020 and 2021. To qualify for this increased limit, donations must be made in cash and must be made to a public charity (not including a donor-advised fund).
o Review timing of tax payments. Remember to review withholding and estimated tax payments – if underpaid, withhold extra tax between now and the end of the year to minimize penalty for underpayment of taxes.
o Make annual exclusion gifts. Annual exclusion gifts can be made of $15,000 per donation recipient, and both spouses may gift, doubling the annual exclusion to $30,000. Gifting of cash or high-basis assets is most tax-efficient. Also, the 2022 annual gift tax exclusion will increase to $16,000 per recipient. The tax savings from gifting is often largest if gifts are made early in the year, so consider making 2022 annual exclusion gifts in January 2022.
o The 2022 lifetime gift/estate tax exemption will change. The 2021 lifetime gift/estate tax exemption is $11.7 million per person – in 2022, the exemption will increase to $12.06 million per person. If Congress takes no action, this exemption will decrease in Jan. 1, 2026, to an estimated $6 million. Consider the use of the exemption prior to the end of 2025.
o Don’t wait to look for 2021 Georgia film credits. Film credits for 2021 must be audited by the Georgia Department of Revenue or a selected accounting firm, which is expected to create a delay in supply.
For questions or advice about which year-end tax planning strategies are right for you, please contact your Windham Brannon tax advisor, or reach out to Barbara Coats at [email protected].
