President Joe Biden’s “Build Back Better” bill was just passed by the House of Representatives and is now on its way to the Senate, where it will likely be negotiated and revised. While it is difficult to predict what additional updates will be made to the bill, individuals should consider the following potential changes as they make year-end tax decisions:
1. Increase in top income tax rates and capital gains tax rates, and decrease in the estate and gift tax exemption. The originally proposed bill contained provisions that would significantly increase the top marginal income tax rates and top capital gains tax rates for individual taxpayers with adjusted gross income (AGI) in excess of $400,000. It also reduced the unified estate and gift tax exemption from $11.7 million to the 2010 exemption level of $5 million. The latest version of the bill eliminates those provisions.
2. Surtax on millionaires and billionaires starting in 2022. For joint filers, the extra tax would equal 5% of modified AGI from $10 million to $25 million and would jump to 8% of modified AGI above $25 million.
3. 3.8% surtax expanded to cover net investment income derived in the ordinary course of a trade or business for single or head-of-household filer with a modified AGI over $400,000, a joint filer with a modified AGI over $500,000 or a married person filing a separate return with a modified AGI over $250,000.
4. SALT cap increased to $80,000. The latest version of the bill contains a provision that rolls back the state and local tax (SALT) deduction limit. The 2017 tax reform law placed a temporary $10,000 cap on the itemized deduction for state and local taxes until 2026. By limiting the deduction, the cap tends to increase taxes paid by wealthier people, who typically pay more state and local taxes and customarily itemize instead of claiming the standard deduction. Under the Build Back Better Act, the cap would be extended through 2031 but would increase to $80,000 for 2021 to 2030 (and return to $10,000 for 2031).
In addition, the following changes will be effective for 2022 unless Congress acts by the end of this year:
An end to the expanded charitable deduction for itemizers. COVID relief legislation passed in 2020 provided that charitable contributions made in cash to most charities were generally deductible to up to 100% of a taxpayer’s gross income, rather than the usual 60%.
Required minimum distributions (RMDs) are back. For 2020, the CARES Act suspended the requirement that those who are 70½ or older take an RMD from certain retirement accounts (including IRAs, 401(k)s and Roth 401(k)s). This requirement is back for 2021 (though it applies beginning at age 72). RMDs from IRAs and 401(k)s are taxable income.
Key Considerations for Year-End Tax Planning
Use appreciated assets to make a charitable gift in 2021. As in previous years, gifts of appreciated assets (stock) remain a best practice. With the continued bull market and the possibility of a retroactive increase in the capital gains tax rates, charitable donations of appreciated property are more valuable than ever, providing not only a deduction to the donor but also the potential to avoid the higher capital gains tax.
Amir Goldman, chair of the Jewish Federation’s Investment Committee, commented that “donating appreciated stock is a fantastic way for you to support critically important institutions in a tax-efficient manner. For Pennsylvania residents, the highest long-term federal income tax is 23.80%, plus a 3.07% Pennsylvania resident tax on capital gains. So if a Pennsylvania donor can donate appreciated stock, they will save 26.87% of taxes on the gains. What a wonderful opportunity to do good and have your resources make a larger impact!”
Consider the impact of the potential SALT cap increase on your tax situation. If the provision is passed and effective in 2021, this may be a good year to increase your charitable giving, perhaps with appreciated stock (see above), and take advantage of itemizing your deductions.
Consider accelerating noncharitable gifts. The possible decrease to the unified estate/gift credit would apply to transfers that occur after Dec. 31. For taxpayers who are intent on making significant gifts (either during their lifetime or in the form of bequests), accelerating those gifts may provide a significant tax advantage.
Charitable donations of cash may be useful if offsetting a large portion of taxable income. 2021 likely will be the last year you can use a charitable donation of cash to offset more than 60% of your adjusted gross income. This may provide an opportunity for taxpayers who are in a position to make a significant charitable gift. Note that contributions in excess of 60% of AGI cannot be made to a Donor Advised Fund (DAF), so plan carefully to balance DAF and non-DAF contributions.
Look into an IRA charitable rollover. The IRA charitable rollover is an attractive option because it can satisfy the RMD requirement without incurring income tax, even if you don’t itemize your deductions. Depending on whether proposed legislation expanding the rollover amount and allowing rollovers to charitable remainder trusts and gift annuities is enacted, this option could become even more attractive in future years.
As with any significant tax and charitable planning, it is always advisable to carefully consider potential changes in the context of your complete financial profile. Please also continue to monitor the above legislative proposals that will be considered by Congress later this year.
Endowment professionals at the Jewish Federation of Greater Philadelphia remain available to work with you and your other professional advisors to maximize the benefits of these and other tax planning strategies for you and the Jewish community. For more information, please contact Director of Planned Giving and Endowments Jennifer Brier at firstname.lastname@example.org or 215-832-0528.
Content is for informational purposes only and should not be construed as legal, tax or financial advice. When considering gift planning strategies, always consult with your own legal and tax advisers.
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