Wells Fargo

2021 Year-End
Planning Guide

 

This year ushered in a new President and Congress, as well as new proposals that could significantly alter the tax landscape. As the uncertainty about possible changes continues to play out, you do not need to be idle. There are still planning strategies and steps you can take now to help potentially lower your 2021 tax liability and keep your financial plan on track into 2022. The deadline for implementing most investment-related strategies that could reduce your 2021 tax bill is December 31, 2021.

In this guide, you will find a number of valuable tips that may be appropriate for your situation and that you may be able to implement before the year ends.

Since state laws may vary from federal tax laws, be sure to discuss these points with your tax and legal advisors for state tax impacts.

Tax law changes and what they mean for you

Effective tax planning considers not only what we know today, but also what might lie ahead. At the time of the update to this guide in November 2021, we are seeing record highs for government spending and legislative proposals for raising future income tax rates, limiting deductions for some taxpayers, and increasing the tax burden on transferring wealth at death. These factors have created much uncertainty about how to choose the best tax planning strategies.

House advances the Build Back Better Act: What could it mean for you?

Key takeaways:

  • On November 19, 2021, the Democratic-led House of Representatives passed the Build Back Better (BBB) Act, a broad $1.75 trillion bill focused on addressing climate change, education, poverty, health care, and other priorities.

  • The House-passed BBB also includes tax increases and tax changes that are applicable to businesses, high income individuals, and individuals with higher-balance retirement-investment accounts.

  • The BBB debate will now continue in the Senate, where the details of the legislation is likely to change.

What this may mean for you:

  • Continue to make decisions to achieve your long-term financial goals and objectives and consult with your advisor to better understand how this legislation may affect your family, business, and overall financial picture.

What tax changes are “in” the bill today and what’s “out” (for now)?

With the Infrastructure Investment and Jobs Act (aka the Bipartisan Infrastructure Framework) signed into law, the focus has turned to the President’s “Human Infrastructure” programs. After months of negotiations and debate, the Democratic-led House of Representatives advanced the Build Back Better (BBB) Act to the Senate.

The chart below is a snapshot that shows how the tax provisions have evolved since the House Ways and Means Committee initially considered Build Back Better Act in September. The spending and tax provisions of the BBB are both expected to continue to evolve in the Senate.

  Build Back Better Act: September 2021 Build Back Better Act – passed by the House in November 2021
Individual income tax rates Increase highest individual income tax rate to 39.6% Removed
Capital gains tax rate Increase long-term capital gains tax rate to 25% effective September 13, 2021 Removed
Qualified business income deduction Provide a maximum allowable qualified business income deduction for individuals, estates, and trusts Removed
Net investment income tax (NIIT) Apply the 3.8% NIIT to trade or business income for individual taxpayers with adjusted gross income (AGI) greater than $400,000 Remains in the Build Back Better Act
Excess business losses Makes permanent the limitation on excess business losses from the Tax Cuts and Jobs Act (TCJA) of 2017 Remains in the Build Back Better Act
Surcharge on high income earners Apply a 3% surcharge on taxpayers with AGI greater than $5,000,000 Apply a 5% surcharge on modified adjusted gross income (MAGI) in excess of $10,000,000 and an additional 3% on MAGI of $25,000,000
State and local tax deduction No change to the state and local tax deduction For years starting after 2020, the limitation for the state and local tax deduction increased to $80,000 through 2030
Lifetime federal tax exemption Accelerate the sunset of the TCJA Provision for estate tax from 2026 to 2022 Removed
Grantor trusts Changes to grantor trust rules that would have impacted estate planning changes Removed
Contributions to Traditional and Roth IRAs At certain income thresholds, no further contributions to a Roth or Traditional IRA if the total value of IRAs and defined contribution retirement accounts exceeds $10,000,000 Remains in the Build Back Better Act
Required minimum distributions from IRAs At certain income thresholds with IRA balances greater than $10,000,000, a required minimum distribution of 50% of the amount above $10,000,000 and 100% of the amount greater than $20,000,000 Remains in the Build Back Better Act
Roth IRA Conversions At certain income thresholds, starting in 2032, Roth conversions prohibited from traditional IRAs or certain employer sponsored plans. Remains in the Build Back Better Act
Back Door Roth IRA conversions Effective January 1, 2022, Roth conversions including after-tax contributions from traditional IRAs or employer sponsored plans prohibited Remains in the Build Back Better Act
Qualified small business stock deduction At certain income levels, elimination of the 75% and 100% capital gain deduction for qualified small business stock Remains in the Build Back Better Act

What are the next steps?

The House passage is just one step in the process, with this bill now moving to the Senate where the provisions are anticipated to evolve. Given the slim Democratic majority in the Senate, it is unclear what the changes will be, and when the Senate will take up the vote. Should the Senate pass the bill, reconciliation between the House and Senate versions will be required.

What actions should I consider taking?

In this fast-changing environment, with little time before year-end, be thoughtful as to what steps to take. Evaluate what traditional year-end tax planning activities may be appropriate for your situation:

  • Consider capital loss harvesting, charitable contributions, and annual exclusion gifts.

  • If gifting strategies were recently started, consider whether they still achieve your goals and objectives. If so, continue the strategy. If you are not sure, take the additional time to have a thoughtful conversation with your advisors.

  • Do not wait too long as these provisions could either return or will naturally occur (for example, the estate tax sunset will still change in 2026).

Consult with your advisor to better understand how this legislation may affect your family, business, and overall financial picture. As changes could happen quickly with final passage potentially occurring towards year-end, it is best to have dual-track plans of action depending upon the result.

Review your investment portfolio

 

  • Review your portfolio and rebalance if needed, or make adjustments due to investment objective changes.

  • For tax planning purposes, determine whether the 0%, 15%, or 20% capital gains tax rate will apply to you and whether adjusting the timing of recognizing capital gains makes sense. If you are in a lower tax bracket, you may wish to take advantage of the lower rates and make additional sales in 2021.

  • Include year-end long-term capital gain distributions from mutual funds when estimating your 2021 gains. If you rebalance your portfolio at year-end and you invest in a mutual fund near the ex-date (the date the security trades without the distribution), you will have income related to the annual capital gains distribution occurring late in the year.

  • Sell investments by year-end to realize losses. If you want to repurchase the position, talk with your advisors about how to avoid a wash sale (the purchase of a “substantially identical” security within 30 days of the loss sale). Wash sales reduce the amount of loss you are able to claim in the current tax year. Also, pay attention to potential dividends or capital gain distribution reinvestment purchases that could create a wash sale.

  • One way to avoid a wash sale while continuing to hold the position is to use the “double-up” strategy. This involves buying additional shares of the security you wish to sell for a loss. You must then wait until the 31st day after the new purchase to sell the original position to realize the loss. The last day to double up and still claim a 2021 tax loss is Tuesday, November 30, 2021.

  • If your capital losses exceed your capital gains, you may use up to $3,000 in additional capital losses to reduce other types of taxable income and carry over the remainder.

Develop your
charitable gifting plan

Give gifts to help increase tax savings

  • Generally, contributions to charities must arrive by calendar year-end, unless made earlier in the tax year.

  • For gift fund contributions, the account must be open and the deposit completed before calendar year-end to qualify as a 2021 gift.

  • Review your itemized deductions. If they are less than the standard deduction, your charitable contributions are not reducing your tax bill.

  • Evaluate “bunching” a few years’ worth of charitable contributions into the current year. This may increase your itemized deductions above the standard deduction threshold so you can receive a tax benefit for those gifts.

    • Consider utilizing a donor advised fund (DAF) for bunching your charitable gifts. Irrevocable contributions you make to a DAF are tax deductible in the year you fund them, but the timing of distributions out of the DAF to charitable organizations can be spread over multiple years. As other gifts discussed above, DAF contributions must be deposited before year-end.

  • Evaluate the tax benefits of gifting long-term appreciated stock or other long-term appreciated assets versus cash. When donating stock that has increased in value since purchase, the deduction is the full fair market value. However, there are no taxes on the appreciation, thereby avoiding capital gains tax (in comparison to selling stock, paying capital gain taxes, and gifting cash to charities).

  • If you expect to realize significant gains this year from investment transactions or a sale of a business or real estate, consider implementing a charitable strategy to reduce your tax bill on these gains.

  • The following charitable opportunities from the CARES Act are still available in 2021. These apply only to cash gifts made to qualifying charities (excludes a DAF, private non-operating foundation, supporting organizations, etc.).

    • You may deduct up to $300 ($600 for joint filers) in addition to your standard deduction, or

    • You may deduct up to 100% of your AGI if you itemize your deductions.

As you determine what charities to gift to, consider including your children in your decision-making process. This can be an opportunity to share why you give, how your gift reflects your family values, and what institutions you select.

AGI limitations on deductions for charitable gifts

Type of organization Cash gifts Long-term capital gain property1 Tangible personal property2
Public charity (2021 only) 100% 30% using fair market value of the asset contributed 30% using fair market value of the asset contributed
Donor advised fund 60% 30% using fair market value of the asset contributed 30% using fair market value of the asset contributed
Private foundation 30% 20% using fair market value if the asset contributed is publicly traded stock 20% using tax/cost basis of the asset contributed3


1. Long-term property is property held more than one year. Short-term property, held one year or less, is subject to different limits.

2. This applies if it will be used by the charity in conducting its exempt functions (e.g., art in a museum). Different limits apply for tangible personal property that will not be used by the charity in conducting its exempt functions.

3. If the fair market value of unrelated use property is lower than the tax cost/basis (depreciated asset), the allowed deduction will be limited to the fair market value.

Source: irs.gov, unless otherwise specified

Charitable contributions that are not deductible in the current year due to AGI limitations can be carried forward up to five years.

Align gifting to individuals now with your estate plan

Incorporate tax planning when gifting to individuals

  • The annual gift tax exclusion limit is $15,000 per recipient in 2021. Gifts up to that amount do not require filing of a gift tax return. Gifts to individuals must be completed by calendar year-end to be considered a current year gift for gift tax purposes. Plan for additional time to make a gift if you will be setting up an account or trust to receive gifts this year. Consider sharing your intentions on how you would like the gift recipients to use your gift.

  • Evaluate the tax benefits of gifting long-term appreciated stock versus cash. Your cost basis and holding period will transfer to the recipient. If the recipient is in a lower capital gains tax bracket than you, some tax savings may result when he or she sells the stock. Make sure you are familiar with the “kiddie tax” rules if the recipient is under age 24.

  • If you gift stock that is in a loss position, the recipient cannot claim your loss as a deduction. However, any appreciation in the stock from the value on the date of the gift up to your original basis will not be taxable to the recipient. Instead, consider selling the stock so that you can use the loss yourself, then gift the cash.

  • Be aware of the five-year gift rule when gifting to a 529 plan. You may elect to gift five years of annual exclusion gifts in one year without using your lifetime gift exemption. This year, the annual exclusion amount is $15,000 so the five-year rule would allow a $75,000 gift to a 529 plan for each beneficiary. A married couple could transfer up to $150,000 out of their estate in one year. You might consider gifting just $15,000 by year-end, then take advantage of the five-year rule at the beginning of next year to further increase your gifting in a short amount of time to $90,000 ($180,000 for a married couple).

    • It is important to note that if you use the five-year gifting rule to gift the full amount (currently $75,000), you cannot make annual exclusion gifts to the same recipient until the five-year period is up.

  • There are additional options available for certain gifts that are not subject to annual or lifetime gift tax exclusion limits. For example, you can pay school tuition or medical expenses without limitation directly to the school or medical provider for the benefit of someone else.

  • Gifts to individuals are not considered taxable income to the recipient and are not deductible by the giver for federal income tax purposes. Some states will allow deductions for contributions to a 529 plan.

Help ensure your assets pass effectively and efficiently to your heirs

  • Review your goals for transferring both your business and personal assets to your beneficiaries.

  • Make sure your basic estate planning documents are in place and up to date. This should include a review of how your assets are titled and your beneficiary designations.

  • If you have established trusts and are funding them, it is important to transfer funds in a timely manner and document the transfer to satisfy certain notice and tax requirements. For example, this would apply when gifting to Crummey trusts, contributing funds to irrevocable life insurance trusts, and paying fair market value rent when your qualified personal residence trust has terminated (if you continue to occupy the residence).

  • Determine whether making lifetime exclusion gifts is appropriate for your situation.

  • Evaluate the pros and cons of the many wealth transfer strategies available with your financial, tax, and legal advisors. These strategies may include the use of trusts, charitable vehicles, life insurance, retirement plan distribution strategies, or intra-family loans.

  • Consider how you wish to communicate your strategies and key factors to your heirs.

  • Be aware of whether state estate taxes would apply in your situation.

Manage your company stock benefits

 

  • Exercising and selling incentive stock options (ISOs), nonqualified stock options (NSOs), or restricted stock grants could have significant tax consequences, including alternative minimum tax (AMT) implications.

  • Review your employer-provided stock benefits well before year-end for any current year vesting or expiration dates. Work with your tax advisor before year-end to develop a tax-efficient near- and long-term strategy. If your portfolio reflects a concentration of your employer’s stock, discuss options with your investment advisor to diversify and potentially reduce risk.

  • Evaluate the pros and cons of an 83(b) election with your tax advisor. This election can impact the timing of taxation of your stock-based benefits, as well as the amount of income that is treated as capital gain rather than ordinary income.

  • Consider using company stock as part of a wealth transfer strategy to your heirs. If the stock has a low basis, this may be a good opportunity for charitable gifting. Before doing so, make sure this type of gifting is allowed by the employer and the share plan.

Take advantage of the tax benefits of retirement accounts

Defer taxes using your retirement accounts

  • In 2021, you can defer $19,500 ($26,000 if you are age 50 or older) of your compensation by the calendar year-end deadline for many employer-sponsored retirement plan accounts.

  • Consider your current and future tax rates, then evaluate whether contributions to a traditional 401(k) or Roth 401(k), if available, may provide more tax benefits.

  • If eligible to make a deductible IRA contribution, consider your current and future tax rates along with your time horizon and evaluate whether it may be more beneficial to contribute to a Roth IRA instead. You have until the tax filing date of April 15, 2022 to make a 2021 contribution.

  • If you are working but do not have access to an employer plan, talk with your advisors about your IRA contribution options. If self-employed, consider setting up a retirement plan such as a SEP IRA or individual 401(k) to help potentially reduce your taxable income.

Receiving distributions

  • If you received a coronavirus-related distribution from your retirement plan in 2020, you are able to recontribute some or all of it in 2021 to avoid taxation on the distribution.

  • Note that RMDs are not waived for 2021. If you turned age 72 this year, discuss with your tax advisor whether to take your first RMD from your IRA by December 31 of this year or by April 1 of the following year. If you delay taking the first year’s distribution until the following year, you will have two RMDs taxable in the same year. After the first distribution, annual distributions must be taken by December 31 of each year.

  • If you are over age 70½, a distribution from your IRA directly to a qualifying charity will be tax-free up to $100,000 per year. This type of distribution also satisfies your RMD.

Align your retirement plan with your goals

  • Evaluate converting a traditional IRA to a Roth IRA if you think future tax rates may be higher, you are interested in lowering future RMDs, or you want to create tax-free income for your heirs. Remember, you no longer have the ability to recharacterize (undo) a Roth conversion. Note that taxes are due upon conversion, so it is important to have funds available outside of the account to pay for them.

  • Review your retirement documents to ensure beneficiary designations are up to date and coordinated with your estate plan.

Use your employer-provided benefit programs

 

  • If you have not fully funded your Health Savings Account (HSA) in 2021, you may still be able to do so. Talk with your health plan administrator about your eligibility to make additional contributions.

  • Flexible Spending Accounts (FSAs) and HSAs typically require annual re-enrollment. Check with your benefits area for the deadline.

  • Review 2021 out-of-pocket expenses and adjust 2022 contribution amounts accordingly.

  • Consider funding an FSA for dependent care expenses if you have a child in day care.

  • Generally, FSA funds must be used within the same plan year unless your employer offers a grace period or carryover. Be sure to check with your health plan administrator for current rules on carryover limitations and grace periods.

    • If you find yourself with FSA funds near year-end and do not anticipate needing them, contact your provider to determine other permitted medical expenses that qualify, such as over-the-counter medications, first aid kits, bandages, contact lenses and solutions, etc. You may find some qualifying expenses that will help you use up the remaining FSA dollars.

    • As you calculate your contributions for 2022, remember to factor in the FSA dollars you are carrying over so you do not end up contributing a greater amount than you can use next year.

Ensure withholding and quarterly tax payments are accurate

 

  • An online IRS Tax Withholding Estimator is now available to help employees, self-employed individuals, and retirees project their tax bill. Work with your tax advisor or review the information below as to why you may want to utilize this calculator.

  • For employees, review the calculator to determine if you need to make any adjustments to how much income your employer withholds from your paycheck.

  • Some taxpayers may need to make estimated quarterly tax payments. To avoid underpayment penalties, you must pay 90% of the tax you owe for the current year, or 100% of the tax you paid in the prior year (110% if your adjusted gross income is over $150,000). Consult with your tax advisor on determining the appropriate methodology for your situation.

  • For business owners, review the calculator and work with your tax advisor to estimate your taxable income and determine the proper amount of quarterly tax payments to make. This process can also start conversations about other tax planning opportunities for your business.

  • Don’t forget about your state income tax payments. Many states require quarterly tax payments if your withholding will not cover your tax bill.

Visit the IRS website or ask your tax advisor for a tax projection to get a better idea of how much you may owe at tax time. IRS Publication 505 also provides some helpful information.

Save on taxes while saving for education

 

  • 529 plan contributions must be invested with the vendor in time to be reportable on a 2021 account statement to be considered a 2021 contribution for gifting purposes.

  • A limited number of states allow contributions through the tax filing deadline to claim a prior year state tax deduction.

  • Contributions to Education Savings Accounts (ESAs) or 529 plan accounts can grow tax deferred.

  • ESA contributions for 2021 can be made up until April 15, 2022.

  • 529 or ESA distributions must occur in the same tax year as the payment of qualified education expenses to be eligible for tax-free treatment.

  • For students attending college in the 2022–2023 school year, the financial aid application period opens October 1, 2021. Note this date since early applications typically receive better financial aid offers.

  • If you are planning to make some changes to your child’s custodial account, estimate your child’s income and talk with your tax advisor to understand the impact of the “kiddie tax” rules.

  • Balances in 529 college savings plans may be rolled to an Achieving a Better Life Experience (ABLE) account in an amount up to the annual contribution limit. ABLE accounts are tax-advantaged savings accounts for individuals with disabilities where the onset of the disability occurred prior to age 26.

  • This section covers federal savings plans, but some states may have additional opportunities for education savings plans that you may wish to look into.

Share with your children and grandchildren your plans to support their education so they may plan accordingly regarding the school they choose, living arrangements, the need for other financial support, and post-graduate plans.

Business owners: Take action to impact your bottom line

 

  • Review expensing elections available to your business to determine the best timing for certain deductions.

  • If your business has purchased new equipment in 2021, be sure to place it into service before the end of the year to qualify for depreciation.

  • Talk with your tax advisor to determine your eligibility for a home office deduction.

  • Review your income tax withholding or quarterly payments. If your income will be lower than expected this year, you may be able to reduce any remaining tax payments.

  • Some states have passed legislation allowing for partners of pass-through entities to claim a state and local tax (SALT) credit in response to the state and local tax cap. Check with your tax advisor to determine if you are eligible for the credit.

  • Consider setting up a retirement plan for your business to help reduce your taxable income. Discuss your options with your advisors to determine which plan may best for you.

  • If you expect to be in a lower tax bracket temporarily due to business losses, this may be an opportunity to offset those losses with additional income by realizing capital gains or completing a Roth conversion at a lower tax rate.

  • If net operating losses exist, consult with your tax advisor to whether to carryforward losses, or carryback against previous years for a refund to help with cash flow.

  • Consider whether bonuses to your overall team or top employees should be paid to lower taxable income.

  • These opportunities may require complex analysis to determine what action to take. If you have not done so already, meet with your tax advisor soon to discuss your situation.

Looking ahead to 2022

Other potential changes that may impact estate planning

For those with complex goals, there are additional strategies to consider that may prove beneficial to meet your planning goals. These strategies can take more time from an analytical and implementation standpoint but may be worth pursuing to determine if they might be advantageous and aligned with your goals and needs.

In 2021, the federal estate, gift and generation-skipping transfer (GST) tax exemption is $11.7 million per person — an all-time high. As you think about your planning options and timeline, keep the following in mind:

  • The current exemption is scheduled to expire at the end of 2025 and revert to $5 million (adjusted for inflation) starting on January 1, 2026.

  • There is a possibility that new tax legislation may pass before the expiration date that would lower the exemption sooner.

  • The current estate tax rate is 40%. This rate could increase as a result of potentially new legislation.

  • Although the estate and gift tax exemptions are currently a shared amount, they could be decoupled with one being lower than the other (for instance, the gift tax exemption could be lower than the estate tax exemption, potentially limiting lifetime planning opportunities).

  • Legislation also may include the elimination of the step-up in basis. This change could result in a capital gains tax liability upon passing of the owner, or the liability may be the responsibility of future generations when the assets are sold.

  • Regulatory changes may eliminate marketability and minority interest discounts, resulting in the elimination of strategies that rely on these discounts.

The IRS has updated the life expectancy tables for 2022. These changes reduce RMDs beginning next year. Contact your financial and tax advisors for more information.

Strategies to consider

Although there has been some activity with regards to interest rates, they are still low from a historical perspective and can make some planning options more attractive. Any steps you undertake require analysis of your current situation and goals, as well as potential legal and tax structures to implement. Strategies addressing how to use the current provisions include irrevocable trusts (including irrevocable life insurance trusts, spousal lifetime access trusts, intentionally defective grantor trusts, grantor retained annuity trusts, charitable split interest trusts, etc.), transfers of interests in entities, and intra-family loans.

Discussing these options with your tax and legal professionals is a great first step to determine whether they are worth pursuing. As noted at the beginning of this guide, although there could be changes to legislation impacting income, estate, and gift taxes, it is difficult at time of publication to determine appropriate steps to take to mitigate tax impact. Therefore, it is important to remain flexible in any planning you do, and not make decisions based solely on tax policy. Sound planning goes beyond tax impact and should align with your overall goals and objectives.

Take action: Review these year-end planning activities

Now

Soon

Before December 31

Disclosures

Wells Fargo & Company and its affiliates do not provide legal or tax advice. In limited circumstances, tax advice may be provided by Wells Fargo Bank, N.A. Please consult your legal and/or tax advisors to determine how this information, and any planned tax results may apply to your situation at the time your tax return is filed.

This guide has been created for informational purposes only and is subject to change. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.

The implementation and maintenance of certain strategies and techniques in this brochure may require the advice of consultants or professional advisors other than Wells Fargo or its affiliates.

Wealth & Investment Management offers financial products and services through bank and brokerage affiliates of Wells Fargo & Company. Bank products and services are available through Wells Fargo Bank, N.A., Member FDIC. Brokerage products and services are offered through Wells Fargo Advisors, a trade name used by Wells Fargo Clearing Services, LLC, and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.