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Advisers are Telling Clients to Make Decisions Based on the Current Tax Code

  • Written by Steel Rose

Biden’s Build Back Better plan, which has passed the House but is stalled in the Senate, calls for changes including:

  • A surtax on individuals earning at least $10 million
  • The expansion of a 3.8% investment levy on income from pass-through entities and a restriction on how their losses can be used to offset profits
  • A bigger federal deduction for state and local taxes -- SALT -- that would cut the overall burden for many high-earning households
  • A series of tax increases on corporate operations
Many of the measures were slated to take effect at the start of the new year, but with congressional deliberations continuing and no guarantee on how long it could take for final passage -- or on the bill passing at all -- it’s nearly impossible to predict what will ultimately end up proving operative from Jan. 1, 2022.

Even lawmakers themselves aren’t sure whether they will make the bill retroactive to the start of 2022, or change the effective dates to apply only from the date of passage.

Senate Finance Committee Chairman Ron Wyden said he’s been talking with tax professionals who have concerns about the timing of the bill.

“When we have something to say, we will say it,” he said. “We still have work to do, and I’m very much aware.”

Working Guidance

Advisers are telling their clients to make decisions based on the current tax code. After suggesting, earlier in the year, potentially selling assets before higher taxes kicked in, many now say to only make those moves if it’s part of a long-term strategy and not to base decisions on what Congress may or may not do.

“We know what the law is now,” said Tim Speiss, a tax partner in EisnerAmper’s Personal Wealth Advisors Group, adding that making legislation retroactive “doesn’t happen very often,” historically. “Anytime you’re suggesting to pick up income early -- especially if they’re not getting any cash -- that’s a tough discussion,” he said, alluding to scenarios including the recording of stock options. “It’s now mostly ‘let’s wait until 2022.’” 

One of the most pressing tax issues for Democrats to sort out is an expansion of the SALT deduction, a key political priority for many lawmakers representing high-tax locations in New York, New Jersey and California. Senate Democrats are debating how to make the write-off, currently capped at $10,000 per taxpayer, more generous. But lawmakers disagree about how high up the income scale it should be available.

The House version of the bill calls for lifting the cap to $80,000 regardless of annual earnings, effective from 2021 -- meaning that taxpayers could claim the deduction on annual returns they file the coming spring. However, to do that, the Senate would need to move quickly to make that deduction available for the filing season, which typically runs from late January through April 15.

Congress can change the rules mid-season -- or even after the deadline -- but that would likely create an administrative nightmare, requiring taxpayers to complete amended returns or put pressure on the Internal Revenue Service to proactively process refunds for those taxpayers.

For those who do want to make year-end tax moves, it’s best to stick with “tried and true” strategies that will be beneficial no matter what Congress does, Alvina Lo, the chief wealth strategist at Wilmington Trust, said.

Among them, she says:

  • Continue to max out tax-preferred accounts, including 401(k) retirement accounts and health savings accounts
  • Look through investment portfolios as the year closes and recognize any losses to offset gains for the year
  • Use the annual gift exclusion to give up to $15,000 per recipient and make any additional charitable gifts by the end of the year
  • Taxpayers who don’t itemize their tax returns this year also can write off charitable donations of up to $300 as an individual or $600 as a married couple. That benefit expires at the end of 2021. To read more click here.

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