Year End Tax Planning in an Uncertain Time
This year, maybe more than any other in my career as a tax specialist, has been overwhelmed by uncertainty in future tax law.
There have been a number of different visions of what future tax rates, capital gains rates, estate taxes, Medicare surtaxes, and innumerable other components of your tax bill will look like.
And now, as we get to the very end of the year, we still don't know whether or not Build Back Better will pass to actually enact these changes. Yet time does not stop, and we still have to make choices.
So here's where we are right now:
1) We are operating as if Build Back Better (BBB) will not be in effect for 2021. There is just too much uncertainty as to whether the bill will pass, when it will pass, what provisions will be in it, and whether they will be retroactive for 2021.
2) We have to assume that some version of Build Back Better will pass and be effective for tax year 2022. We don't know the details, but this coming year is the opportunity for Democratic party to put their vision of tax law into effect before the uncertainty of the 2022 mid-term election.
The most likely framework to go into place is something substantively similar to what is in the current version of Build Back Better. For now, we are planning as if Build Back Better will be in place for 2022 when it comes to our planning assumptions.
What does this mean for our clients, practically?
1) We are acting as though the $10,000 state and local tax itemized deduction cap will be in place for 2021, but potentially not (or increased in some degree) for 2022. If you have already paid your property taxes in January, likely you should wait to do so again until January 2022. If you are subject to state income tax and have already paid in roughly $10,000 or more, you should also wait to pay your real estate taxes until January (if able.)
2) If you have been taking the standard deduction in recent years, you will likely do so again for 2021 barring any major changes in your situation (buying a new house, significant new charitable contributions, or significant medical expenses.) If you are considering making a large contribution, we would likely recommend that you hold off to do so until 2022 if you have generally been taking the standard deduction.
3) The backdoor Roth contribution is likely going to be eliminated when BBB in enacted. If you would like to make one for 2021, we recommend you do so ASAP.
If you have any questions, please contact us immediately, especially so we have time to get you answers considering the holidays. If Congress does move to pass BBB this year, you will be hearing from us again as soon as we can get our analysis into words for you all.