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Wealth Planning

Year-end tax planning: 5 actions to take in times of uncertainty

Proposed legislation may enact significant changes to tax law. Here’s what you can do even while Congress debates. 


Congress complicated most wealthy U.S. taxpayers’ year-end planning when it began considering a bill that proposes to meaningfully alter the tax landscape. The proposed measure could be passed before December 31 and go into effect January 1, and may have some key, retroactive features.

The potential new law—called the Build Back Better Act (BBBA)—includes increases to the top tax rates on ordinary income, capital gains and corporate income. Additional provisions would reduce the efficacy of some gift and estate tax planning strategies.

All of the BBBA’s proposals, if adopted, would significantly affect most top earners’ tax planning in the years ahead.

No one expects the bill, introduced on September 13, to pass unchanged—if it passes at all. Even many of its advocates acknowledge many provisions will be removed; others, modified. Moreover, other measures, not yet included, may be added later. That’s what happened in 2017, the last time significant tax-related legislation was enacted.

So how should you approach your traditional year-end planning, given all this uncertainty? 

1. For starters: What’s your “base case”? You can find out now.  

Your first step is to get a “pro forma” tax return from your tax advisor so that you can understand your current tax situation. From there, you can see what would happen if you were to realize more income or incur any additional deductions this year. 

Good information to have every year, the pro forma is even more important this year. 

How important? A few numbers can give you a sense. If the BBBA were enacted as is:

  • The top long-term capital gains (LTCG) tax rate would go from 20% to 25%—effective September 14, 2021
  • The top ordinary rate (37% for a married couple earning more than $628,300 in 2021) would increase to 39.6% for a married couple with income in excess of $450,000 in 2022
  • A 3% surtax would be imposed on income of taxpayers in excess of “modified” adjusted gross income (AGI) of $5 million beginning in 2022

With your tax snapshot in hand, you can better assess whether it makes sense to implement any of these tax planning strategies before year-end.

2. Can you reduce your 2021 tax liability?

 



3. Are you making the most of your compensation and benefits? 





4. Are you giving tax-wisely to your family?



5. Are you getting the help you need?

These are just a few examples of the many opportunities you may have right now to strengthen your financial health before year-end. Speak with your tax advisor about which actions may be right for you.

Also consult with your J.P. Morgan team, which can work closely with your tax advisors and help you evaluate how any potential action might align with your financial goals.

The sooner you have these discussions, the more benefit you may be able to reap from your year-end planning.

 

1.Please consult your tax advisor to see whether tax-loss harvesting is available with your accounts and how potential buybacks may be done successfully.
2. IRC Sec. 1222. Keep in mind that short- and long-term losses are first netted against short- and long-term gains, respectively.
3.IRC Sec. 1091. Before acting, please be sure to discuss your potential buybacks with your tax advisor.
4.IRC Sec. 1091. Tax should not be the only factor to drive an investment decision.
5.In the BBBA introduced on September 13, 2021, if an individual taxpayer has more than $20 million in aggregate traditional IRA, Roth IRA and defined contribution plans, that taxpayer would first be required to purge Roth monies (up to 100%) to get under the $20 million threshold, and could then choose where the 50% excess distribution comes from.
6.Up to $100,000 per taxpayer.

 

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