Deck the Halls with New Tax Laws- Again?

In many of our personal lives, December can be quite hectic.?The calendar and To Do List fill up quickly with holiday parties, shopping, gift wrapping, Christmas cookies and arranging time with family.?To add to the stress, all these tasks and obligations are compressed into a shortened timeframe, prior to the final week of the month when the Christmas and New Year holiday celebrations actually take place.?The old axiom of the “hustle and bustle” of the holiday season is certainly an appropriate description.

In recent years, Uncle Sam has exacerbated the stress level for this time of year even with last-minute changes to tax laws & regulations.?Recall that on December 20th, 2019, Congress passed the SECURE Act which swept in big changes to RMD requirements & how inherited IRA RMDs are handled along with many other changes.?That provided tax & wealth planners a frenzied 10 days to digest, recommend and implement client changes before year-end!?Very Grinch-like if you ask me.

After the bevy of Covid-related regulatory & tax changes since then (CARES Act, March 27th 2020 & Infrastructure Investment and Jobs Act, November 15th, 2021), Congress is at it again with the Build Back Better Act, passed by the House of Representatives on November 19th, 2021.?I want to emphasize:?this still needs to pass the Senate and will likely undergo meaningful changes before it gets sent back to the House and then on to final signature by President Biden.?

In addition, as of mid-December, it now appears this legislation will likely be delayed for consideration at least until after January 1, 2022.

But some of the key provisions for personal income taxpayers which could become law include:

• Starting Jan. 1, 2022, the legislation would prohibit use of the mega-backdoor Roth conversions.
• Starting Jan. 1, 2022, the bill would also eliminate backdoor Roth conversions of after-tax
• Starting in 2032, the legislation would prevent single people earning more than $400,000 a year and married couples with incomes above $450,000 from converting pretax retirement-account money to Roth accounts (aka “Roth Conversion”)
• The plan would raise the $10,000 cap on the state and local deduction to $80,000, starting in tax year 2021. It would extend that higher cap through 2030, beyond the current cap’s scheduled expiration after 2025, with the cap falling back to $10,000 in 2031.?
• High-income business owners would face a 3.8% tax on active business income. This provision would apply to those with MAGI exceeding $400,000 ($500,000 for couples) and is effective for taxable years beginning after December 31, 2021.

Planning Opportunity:?Save Those Charitable & Medical Receipts Again?

With the SECURE Act (2019) limiting the deduction of taxes paid (real estate, state and local) to only $10,000 for a married filing jointly return, many taxpayers in high-tax states lost a large tax deduction and were resigned to taking the standard deduction ($25,100 for MFJ).

But if the House bill becomes law and is retroactive to 2021, many of taxpayers may end up itemizing again in 2021 if the SALT limitation (state and local taxes) is raised to the proposed level of $80,000.?This would also mean their charitable contributions and some out of pocket medical expenses (above the 7.5% of AGI threshold) would now become deductible instead of falling under the higher standard deduction amount.?From what I’ve researched, it’s likely this $80,000 cap will be adjusted down and/or phased out at higher incomes so as to avoid disproportionally benefitting higher earners.?That said, it’s probably still worth keeping track of those expenses again as many high earners may end having a SMALLER tax liability in 2021 (through 2030) than they originally projected!

In addition, what is NOT in the bill is almost as newsworthy.?Left on the proverbial “cutting floor” of the House chamber and excluded from the bill were some major proposed changes including:

• ?Elimination of the step-up in basis on assets held longer than one year
• An increase in tax rates from current levels
• Reduction in the starting point for the highest bracket to $400,000 (MFJ at 37% starts at $647,850 in 2022)
• Reduction in estate tax exemption (which sunsets at the end of 2025 anyway) from the current level of $11.7 million for a married couple

Bottom Line:

The Federal government doesn’t do us any favors when it comes to their frenzied and last-minute tax law changes right before year-end.?The best we can do is to stay vigilant on monitoring the developments out of Washington D.C. and stay informed.?But the changing tax laws can affect different taxpayers in different ways, depending on their personal situation.?This is why we keep a sharp eye on the news (even if we’re on Christmas Holiday) and dig deeply into the law changes so we can work with our clients and their CPAs to minimize tax liability and leave more for Christmas gifts & donations!

Disclaimer:

Johnson Investment Counsel does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.