2021 Year-End Tax Trick or Tax Treat?

As we await resolution for the proposed tax legislation from the House Ways and Means Committee, it’s clear that the upcoming tax season has the potential to be full of changes for both individuals and businesses.

Though the tax proposal faces a long road through the House and Senate, now is the time to take advantage of opportunities to plan for these changes. Our upcoming webinar will discuss multiple planning options to help you be prepared if and when changes occur.

While there is an abundance of items up for debate in the 800+ pages of the proposed tax legislation, we’ve identified the top 10 items to keep an eye on and plan for. Again, at the time of this blog, all items are proposed, not passed. Many modifications could be made to timelines, implementation dates, and proposed amounts.

Top 10 Proposed Tax Items to Plan For

1. Top Marginal Income Tax Rate Increase for High-Earning Individuals
   • Rate increase from 37% to 39.6% for:
     • Married individuals filing jointly with taxable income over $450,000
     • Single taxpayers with taxable income over $400,000
     • Married individuals who file separately with taxable income over $225,000
   • Increase also applicable to trusts and estates with taxable income of $12,500 or more.
2. Surcharge Tax for High-Earning Individuals
   • This proposed tax would be equal to 3% of a taxpayer’s modified adjusted gross income (AGI) more than $5 million (or $2.5 million for married individuals who file separately).
3. Net Investment Income Tax (NIIT) for High-Earning Individuals
   • NIIT would be expanded to include net investment income of a trade or business.
   • Applicable for individuals with taxable income over $400,000; and individuals filing a joint return with taxable income over $500,000.
   • NIIT expansion would also be applicable to trusts and estates.
   • Currently, taxpayers are not required to apply the NIIT to passthrough entity income (S-Corps/Partnerships). This change could have significant impact on income that is the result of a trade or business and/or capital gains that result from the sale of a trade or business.
4. Qualified Business Income Deduction for High-Earning Individuals
   • Proposed legislation limits maximum allowable deductions to:
     • $500,000 for individuals filing jointly
     • $400,000 for individual returns
     • $250,000 for married individuals filing separately
     • $10,000 for trusts and estates
5. Capital Gains Rate Increase
   • Increases to 25% and is effective for transactions occuring after September 13, 2021.
   • The proposed transition rule would allow a preexisting statutory rate of 20% to apply for gains and losses for the portion of the taxable year beginning prior to that date.
   • Capital gains resulting from a transaction prior to September 13, 2021, but that are not recognized until later in the same year would be considered as occurring prior to September 13, 2021.
6. Estate and Gift Tax Exclusion Reduction
   • Exemption lowered to $5 million per individual, adjusted for inflation.
   • Effective January 1, 2022
7. Grantor Trusts
   • The property of the trust must be considered part of the grantor’s estate for estate tax purposes.
   • Distributions from the grantor trust must be treated as a gift from the grantor to the beneficiary. Exceptions include distributions from a grantor trust to the grantor or the grantor’s spouse.
   • If a grantor trust ceases to be a trust, the trust assets would be considered a gift.
   • Sales and exchanges between grantor and grantor trust would now be taxable.
8. Corporate Tax Rate
   • The current flat rate of 21% was replaced with graduated rates based on income.
     • • 18% on first $400,000 of income
       • 21% on income up to $5 million
       • 26.5% on income over $5 million
       • Remember, the top corporate rate will apply to personal service corporations.
9. Capital Gains Exclusion Rates
   • Proposed legislation indicates that the 75% and 100% exclusion rates applicable for realized gains resulting from qualified small business stock sales would not apply to taxpayers with adjusted gross income equal to or more than $400,000.
10. Retirement Plan Changes
    • Proposed legislation eliminates Roth conversions for both IRAs and employer-sponsored plans for the following:
      • Single taxpayers (or married filing separately) with taxable income over $400,000
      • Married taxpayers filing jointly with taxable income over $450,000
      • Heads of household with taxable income over $425,000
    • Change also applicable to distributions, transfers, and contributions during taxable years after December 31, 2021.

Next Steps

Don’t let current uncertainty prevent you from being prepared. Join us for our upcoming webinar Tax Trick or Tax Treat where we’ll discuss how to plan now to maximize savings and avoid being caught off guard by potential tax changes.