We want to share a few items for 2021 year-end planning consideration as a result of the Build Back Better reconciliation bill introduced in Congress on September 13.
One of the biggest changes is the elimination of Roth conversions of after-tax dollars beginning in 2022. Please see our full blog post on this topic.
2021 Year-End Planning Considerations for Income Taxes
If your income exceeds $400,000 for single or $450,000 for married filing joint, your long-term capital gains rate may be higher on investment sales completed after September 13. If the bill passes, the rate increases by 5 percentage points from 20% to 25% for taxpayers above this level. In addition, the 3.8% Medicare tax applies. For your 2021 year-end planning consideration, you’ll want to understand the tax consequences of any action under current and possible future rates.
Wash sale rules currently don’t apply to digital assets. Beginning next year, wash sale rules would apply to them if the bill passes. If you have losses in cryptocurrencies, you may wish to sell them now to preserve your loss for tax purposes while you still have the option to claim the loss and repurchase them without waiting 30 days.
Estate Tax and Gifting
The bill also accelerates the reduction in the estate tax exemption from the currently scheduled 2025 back to 2022. If the bill passes, the estate tax exemption would drop to approximately $6 million per person ($12 million per couple) beginning next year. Today it’s $11.7 million per person. For those extremely high net worth individuals desiring to reduce future estate tax liabilities, they may wish to explore gifting the full amount of the current exemption. The IRS has confirmed that there will be no claw-back provisions.
Another provision that affects how individuals limit the assets included in their estates is updated rules around Grantor Trusts. Grantor Trusts include Grantor Retained Annuity Trusts, Intentionally Defective Grantor Trusts (like ILITs), and Spousal Lifetime Access Trusts. Trusts that are fully executed and funded prior to the law’s enactment would still benefit from the existing rules. So, if you’ve been considering one of these strategies, it’s critical that you meet with your estate planning attorney now. Jeff Levine on the Kitces blog has created an excellent overview of these changes.
Similar to the Grantor Trust changes, the use of discounted valuations for Family Limited Partnerships is seriously limited by the bill. These changes also take place after the date of enactment, so this is another good opportunity to sit down quickly with an estate planning attorney if you’ve been considering this strategy for your estate planning.
The bill of course contains numerous other provisions. We’ve highlighted the ones here where action before year-end could be helpful. If you have questions about this bill and how it may affect your situation, please reach out to us.