Skip to content

Tax Planning

December 06, 2021

Tax Considerations as the Build Back Better Act Moves to the Senate

On November 19, the House passed its version of President Joe Biden’s spending and tax proposal, known as the Build Back Better Act (BBBA). According to the Congressional Budget Office’s estimate, the bill’s spending proposals and tax changes will increase the budget deficit by nearly $380 billion over 10 years. However, the White House is counting on additional revenue from future enhanced IRS enforcement to bring the budget deficit projections down to approximately $160 billion over the same 10-year timeframe.

The bill now waits in the Senate, where several members have expressed the desire to make changes on both the spending and revenue sides. One targeted spending cut is a reduction in the House’s Paid Family Leave provision, which costs approximately $200 billion. If the provision is removed in its entirety, the spending and revenue estimates for the bill would be roughly
in balance. Other provisions of the bill are also being debated, including a cap on the state and local tax deduction, which would increase from $10,000 to $80,000 annually through 2025 under the proposed legislation.

Most of the tax proposals contained in the House’s version of the BBBA have an effective date of January 1, 2022. While Democrats hope to have final legislation ready for the president’s signature prior to year-end, it is possible the process will extend into the new year. Even if the BBBA isn’t passed until early 2022, we still expect most of its provisions to be effective as of January 1, 2022. For a fuller discussion of what is in the BBBA, please see Glenmede’s November 8 summary here.

Year-end planning considerations

Income tax – a new surtax

The current House proposal adds a new surtax to high-income earners. A 5% surtax will apply to an individual’s modified adjusted gross income (MAGI) exceeding $10 million, and an additional 3% will apply to MAGI exceeding $25 million. If you expect to exceed these thresholds in 2022, look for opportunities to accelerate income in this last month of 2021, including exercising stock options, accelerating business distributions or triggering capital gains you would expect to incur next year.

For trusts, the new surtax rates are scheduled to apply at income thresholds of $200,000 and $500,000 of MAGI. While many trusts have provisions allowing income to be distributed to beneficiaries either automatically or at the discretion of a trustee, capital gains represent a more difficult problem. For nongrantor trusts, capital gains are generally taxed at the trust level. Depending on the portfolio inside your trust, you may want to consider harvesting taxable gains in 2021 if it would allow you to limit or avoid the surtax in 2022 and beyond.

Roth conversions and new IRA limits

Under the current proposal, “back door” Roth conversions will no longer be permitted after December 31, 2021. These types of conversions involve IRAs funded with nondeductible contributions.

Regular Roth conversions that are 100% taxable will continue to be permitted for high-income taxpayers until 2032. By leaving open this 10-year window of opportunity, the government is encouraging high-income taxpayers to convert regular IRAs/401(k)s to Roth accounts now and, as a result, help increase current tax revenue.

The House bill delayed until 2029 the effective start date of onerous required distributions from “Mega-IRAs” exceeding $10 million. If the Mega-IRA rules apply to you, a planned long-term approach to distributions is warranted and can be evaluated through the completion of a goals-based wealth review.

Charitable giving

Once again in 2021, cash contributions to public charities can be deducted up to 100% of a taxpayer’s adjusted gross income (AGI). Any unused charitable deduction can be carried forward and used as a deduction in the next five years.

For many taxpayers, donating long-term appreciated securities represents a valuable planning opportunity. Contributing this type of asset to charity not only allows a taxpayer to avoid tax recognition on the built-in capital gain of the asset but also to receive a charitable deduction for the fair market value of the security.

If you plan to accelerate income into 2021 to avoid the possible new surtaxes in 2022 or are considering a Roth conversion, now may be the perfect time to create a donor-advised fund (DAF) at Glenmede. A DAF will allow you to obtain a current-year charitable tax deduction while giving you time to consider who the ultimate charitable recipient of the gift will be.

Before making your next gift to charity, talk to your relationship manager about how to best optimize the tax advantages of your charitable intentions.

Estate planning

Even though the current BBBA does not reduce the current estate tax exemption of $11.7 million per person, putting assets into a trust for future generations can still be an effective tool to remove future growth of those assets from your taxable estate. For many taxpayers, an irrevocable transfer of the full exemption amount is unappealing for many reasons. However, creating a trust that includes your spouse as a permissible beneficiary, known as a Spousal Lifetime Access Trust, may be an estate-planning vehicle that makes this transfer compelling.

While there are currently no estate tax proposals in the current version of the BBBA, the early versions of the bill contained provisions severely limiting estate-planning tactics used by many individuals. These provisions will most likely stay out of the final BBBA, but you should begin planning now if the day comes when they may be reintroduced.

If you would like to review your current estate plan within the context of a holistic tax and financial planning approach, please speak with your relationship manager about embarking on a goals-based wealth review.

 

 

This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.