November092021
2021-22 Tax Planning Guide – Staying Prepared and Flexible Through the Uncertainty
Client Alerts
11.9.21 | Client Alert
Ongoing attempts at massive tax reform targeting high net worth individuals and corporations … heated political debate in Washington over the direction of the nation … and the still significant impact of the Tax Cuts and Jobs Act (TCJA) as well as the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other new tax legislation can lead to paralysis in one’s tax planning. However, it remains vital to take active steps to protect and enhance your financial position, while remaining nimble and flexible to adjust to possible changes.
Berdon’s 2021-22 Tax Planning Guide provides a powerful starting point with an overview of significant tax law changes and planning opportunities essential to developing a strategy and minimizing tax liability. Leverage this tool as you work closely with your tax advisor to identify the best strategies that align with your particular situation today, and that will also be flexible enough to enable you to adjust to eventual change.
This valuable reference tool is available online — which updates as tax laws change — and in hardcopy. The guide is segmented into important areas of interest such as Income & Deductions, Family & Education, Investing, Business, Retirement, Estate Planning, and Tax Rates. The guide provides charts and case studies to clarify complex concepts and help identify opportunities to pursue.
Highlights of the Guide include:
State and Local Tax Deduction. Through 2025 under the TCJA, a taxpayer’s entire itemized deduction for state and local taxes — including property tax and the greater of income or sales tax — is limited to $10,000 ($5,000 for married filing separately). Deducting sales tax instead of income tax may be beneficial if you reside in a state with no, or low, income tax or if you purchased a major item, such as a car or boat. Note that a number of high tax states, including New York, have developed measures to work around this limitation under certain circumstances.
Mortgage Interest Deduction. Taxpayers generally can deduct interest on mortgage debt incurred to purchase, build, or improve their principal residence and a second residence. Points paid related to one’s principal residence also may be deductible. Through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 (married filing jointly) for debt incurred after December 15, 2017, with some limited exceptions.
Charitable Donations (2021 Opportunity). The (CARES) Act increased the 2021 deduction limit for cash gifts to qualified public charities to $600 for married couples filing jointly, but only if you do not itemize deductions. For large donations, this year might be beneficial as the deduction limit for such gifts to public charities is 100% of adjusted gross income (AGI) for 2021. This was a Consolidated Appropriations Act (CAA) one-year extension of a CARES Act provision that increased the normal 60% of AGI to 100% for 2020.
“Kiddie Tax.” For 2021, this generally applies to unearned income beyond $2,200 of children under age 19 and of full-time students under age 24 (unless the students provide more than half of their own support from earned income).
Child Tax Credit (2021 Opportunity). The American Rescue Plan Act of 2021 (ARPA) raises the eligibility age to under 18 at the end of 2021. The credit is increased to $3,000 per child and to $3,600 per child age six subject to certain phaseouts.
Tax Breaks on Student Loans.
- Under the CARES Act, through 2025, employers can provide up to $5,250 toward employee student loan payments on a tax-free basis. The payment can be made to the employee or the lender.
- The ARPA requires the tax-free treatment of student loan debt forgiven between December 31, 2020 and January 1, 2026.
Deduction for Pass-through Businesses. Through 2025, the TCJA provides a qualified business income deduction (known as the “Section 199A deduction”) for sole proprietorships and owners of pass-through entities with certain exceptions. The deduction generally equals 20% of qualified business income (QBI), subject to limits that can begin to apply if 2021 taxable income exceeds the applicable threshold — $164,900 or, if married filing jointly, $329,800. The limits fully apply when 2021 taxable income exceeds $214,900 and $429,800, respectively. Consult your tax advisor for more information.
Deferring Income to Next Year. If your business uses the cash method of accounting, you can defer billing for products or services at year-end. If you use the accrual method, you can delay shipping products or delivering services.
Section 179 Expensing Election. This allows you to currently deduct the cost of purchasing eligible new or used assets, such as equipment, furniture, off-the-shelf computer software, qualified improvement property, certain depreciable tangible personal property used predominantly to furnish lodging, and the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems. Important: For qualifying property placed in service in 2021, the expensing limit is $1,050,000. The break begins to phase out dollar for dollar when asset acquisitions for the year exceed $2,620,000.
Bonus Depreciation. An additional first-year depreciation is available for qualified assets, which include new tangible property with a recovery period of 20 years or less (Examples: office furniture and equipment), off-the-shelf computer software, and water utility property. Important: Under the TCJA, through December 31, 2026, the definition has been expanded to include used property and qualified film, television and live theatrical productions. For qualified assets placed in service through December 31, 2022, bonus depreciation is 100%. For 2023 through 2026, bonus depreciation is scheduled to be gradually reduced. For certain property with longer production periods, these reductions are delayed by one year.
Employee Retention Credit. Under the CARES Act, this credit was designed to aid businesses whose operations were fully or partially suspended under a government order or when businesses experienced a substantial decline in gross receipts (more than 50% reduction in 2020 or more than 20% reduction in 2021 compared to the same quarter in 2019). For eligible employers, the credit equals 50% of up to $10,000 in qualified wages, including allocable health care expenses, paid to an eligible employee after March 12, 2020 through December 31, 2020. The CAA and ARPA extended the credit through June 30, 2021, and December 31, 2021, respectively, and for those quarters, increased the credit to 70% of up to $10,000 of qualified wages for a maximum credit amount of $7,000 per employee per quarter.
Interest Expense Deduction. Generally, under the TCJA, interest paid or accrued by a business is deductible up to 30% of adjusted taxable income (ATI). Taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three previous tax years generally are exempt from the interest expense deduction limitation. The CARES Act increased the interest expense deduction limit to 50% of ATI for the 2019 and 2020 tax years.
Net Operating Losses (NOLs). The TCJA generally reduces the maximum amount of taxable income that can be offset with NOL deductions from 100% to 80%. Also, it generally prohibits NOLs from being carried back to an earlier tax year — but it allows them to be carried forward indefinitely (as opposed to the 20-year limit under pre-TCJA law). Opportunity: Under the CARES Act, taxpayers are now eligible to carry back NOLs arising in 2018 through 2020 tax years to the previous five tax years. The Act also allows taxpayers to potentially claim an NOL deduction equal to 100% of taxable income for prior-year NOLs carried forward into tax years beginning before 2021.
Pass-through Entity “Excess” Business Losses. Through 2025, the TCJA limits deductions to current-year business losses incurred by noncorporate taxpayers. Such losses generally cannot offset more than $250,000 ($500,000 for married filing jointly) of income from other sources such as salary, self-employment income, interest, dividends, and capital gains. Excess losses are carried forward to later tax years and can be deducted under net operating losses rules. Important: The CARES Act temporarily lifts the limit—enabling taxpayers to deduct 100% of business losses arising in 2018, 2019, and 2020.
Required Minimum Distributions (RMDs). Historically, after taxpayers reaches age 70½, they were required to begin to take annual RMDs from their IRAs (except Roth IRAs) and, generally, from any defined contribution plans. However, the age has now increased to 72 (for taxpayers born after June 30, 1949) but, the RMD waiver that was available in 2020 has not been extended to 2021.
Gifting Interests in a Family Limited Partnership (FLP). One way to benefit from valuation discounts is to set up an FLP. You can fund the FLP with assets such as public or private stock and real estate and then gift limited partnership interests. Warning: The IRS may challenge valuation discounts, so a professional, independent valuation is recommended. The IRS also scrutinizes FLPs, so be sure to seek out an expert to set up and operate yours properly.
The above is only a selection of the wealth of information available in Berdon’s 2021-22 Tax Planning Guide. After identifying potential opportunities, contact your tax advisor to review the specifics and/or discuss other opportunities that may result in significant benefits to you, your family, and your business. Berdon professionals are always available to assist. If you are interested in connecting with one of our tax specialists, please email contactus@berdon.com.
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