With Congress unable to come to an agreement for the Build Back Better plan in 2021, here’s what you need to know about your planning for this year - and beyond.
The latest news out of Washington seems to end the chances that the tax law changes included in the Build Back Better (BBB) proposal will be approved before the end of the year. In fact, it’s uncertain if they will pass in 2022 - or ever, for that matter. While this can make planning difficult, here are a few things for you to keep in mind:
Hold the SALT
The increase in the state and local taxes (SALT) cap from $10,000 to $80,000 will likely not happen in 2021, and while it’s possible it will be revisited in the new year, it may come with new restrictions and caveats. If you’ve already exceeded the $10,000 cap this year, it may make sense to delay any additional state income or property taxes until next year to take advantage of possibly claiming a larger deduction next year. Before you decide, consider the following:
- Certain states provide a tax credit or other benefit based on the property taxes you paid during the year. Before delaying your full property tax balance until January, determine if you’re first maximizing your state benefit.
- If you have underpaid your state income tax liability for the year, you could be subject to a penalty if you delay your payment. Weigh the cost of an increased penalty against the potential benefit of a larger deduction next year.
- An increased SALT cap in 2022 would make it easier to itemize deductions versus the standard deduction. This means it would be easier to deduct other expenses next year, like charitable contributions. If you’re considering giving to charity now or in January, you may be more inclined to wait until next year in anticipation of this change.
The Backdoor Stays Open
The future of the backdoor Roth IRA has been a hot topic, and – at least through the end of 2021 – remains an available option for those looking to convert after-tax dollars from a traditional IRA to a Roth. Be sure to complete this transaction and conversion by December 31. And while the backdoor may still be eliminated in 2022, it’s unclear when it would take effect. If you’re looking to do this in 2022, consider doing it early in the year to potentially avoid retroactive penalty dates. In a scenario where a bill passes with a retroactive date, you may be required to withdraw the converted amount or be subject to a penalty.
Stake Your (Income) Claim
Much of the BBB plan’s spending would be paid for by an additional tax on high income taxpayers and trusts beginning in 2022. While unclear when it would take effect, it’s expected that some form of those charges would be included in any new version of the bill.
For trusts, beneficiaries would be subject to the individual tax thresholds, but trusts that don’t distribute their income would be subject to a 5% tax on income over $200,000 and an additional 3% on income over $500,000.High-income taxpayers would be subject to the same tax rates, but at much higher income levels - adjusted gross income of $10 million and $25 million, respectively. These thresholds are unlikely to fall much below the proposed levels in any revised bill, so most taxpayers will not be impacted. If you do qualify, you may want to consider recognizing income earlier in the year rather than later to avoid the surcharge in the event of a mid-year tax increase. Recognizing income could come in the form of taking retirement account withdrawals, recognizing capital gains, exercising stock options, and more.
Other Discussed Items
Earlier BBB proposals included higher tax rates on those with roughly $400,000 or more in income, beginning in 2021. The latest version of the bill has removed these provisions, and they seem unlikely to return next year. Unless you meet the threshold for the proposed high-income surcharge, you likely will not have to be concerned about a tax increase.
Previous versions of BBB also included changes to the estate tax system, but the majority of those have been removed. These changes had included a cut in the estate tax exemption, limitations on grantor trusts, and other provisions. The estate changes currently scheduled to happen in 2026 are still included, so plan accordingly with your attorney.
Stay Aware and Stay Prepared
If we’ve learned anything over the last couple years, it’s that anything can change. While it’s important to be ready to react to these changes, make sure you don’t overreact to any proposals that may not take effect.
Talk with our team if you have any questions on how to wrap up your year-end plans, or to prepare for 2022.
Baird does not offer tax or legal advice. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.