The latest news out of Washington seems to end the possibility that the spending and tax law changes included in the Build Back Better (BBB) proposal will be enacted before the end of 2021. In addition, the prospects for passing these changes in 2022 remains uncertain. Planning around this ambiguity is difficult, and while there is no guarantee what will happen next year or beyond, here are some things to consider regarding the recent proposals and planning for this year and next.
INCREASE IN THE SALT DEDUCTION LIMIT The proposed increase in the SALT deduction from $10,000 to $80,000 is not likely to happen for 2021. It’s possible it comes up again for 2022, however, albeit structured a bit differently (smaller increase, income eligibility limits, etc.). Therefore, it may make sense to delay any state income or property tax payments into 2022 where possible for those who have already exceeded the $10,000 cap this year in hopes of claiming a larger deduction next year. • However – be aware of any state tax benefits to making those payments before year-end. For example, Wisconsin offers a tax credit based on the amount of property taxes paid during the year. To receive the maximum $300 credit, you must pay at least $2,500 of property tax this year, so consider paying at least that amount before December 31, while delaying the balance until January. Other states may have similar provisions. • Taxpayers who have underpaid their state income tax liability (and will be subject to an underpayment of estimated tax penalty for the year) may still want to pay their state taxes before December 31. These taxpayers must weigh the cost of an increased penalty against the potential benefit of a larger deduction next year. • An increased SALT cap next year would also make it easier for taxpayers to itemize their deductions rather than use the standard deduction next year. This means it would be easier to deduct other expenses next year like charitable contributions. Those deciding whether to give to charity now or in January may be more likely to wait until next year in anticipation of this increase.
BACKDOOR ROTH CONTRIBUTIONS The BBB proposal would have eliminated the ability to convert after-tax dollars from a Traditional IRA/401(k) to a Roth IRA/401(k) beginning in 2022. We have been advising those who are considering this for 2021 to be sure to complete this transaction (including the Roth conversion) by December 31. If a bill is enacted in 2022, we expect this provision to be part of it (along with all the other Roth-related proposals), but there’s no way to know when it would be effective. Because any new proposal would not likely pass until the Spring at the earliest, it seems unlikely that this provision would be retroactive to January 1, 2022. However, both houses of Congress seem to support the change, and taxpayers have been given plenty of warning that it could be coming, so a January 1 date is not impossible. • Taxpayers looking to do this transaction should do so early in 2022. If a change is made retroactive to January 1, they may be required to withdraw the converted amount from their Roth IRA or else be subject to an excess contribution penalty.
HIGH INCOME SURCHARGES Much of the proposed spending in the BBB would be paid for with a pair of surcharges on high income taxpayers beginning in 2022 (5% on couples with AGI over $10 million, plus another 3% on AGI over $25 million; half those AGI levels for singles). If a revised BBB bill is passed, some form of those surcharges is expected to be included, but again the effective date is unknown. It’s possible they could become effective sometime during 2022. • This surcharge would also apply to trusts, and at much lower income levels. The 5% rate would apply to income over $200,000, and the additional 3% on income over $500,000. Income passed out to beneficiaries would be subject to the thresholds for individuals, but this tax would impact planning for irrevocable trusts if it became law. • In order to avoid a potential mid-year tax increase, high-income taxpayers may be better off recognizing income earlier in the year rather than later to avoid that surcharge. This would mean taking retirement account withdrawals, recognizing capital gains, exercising stock options, etc. The income thresholds for this surcharge are unlikely to fall much below the proposed levels, if at all, so most taxpayers won’t be affected. Those who would be, however, should weigh the impact of accelerating that income recognition against the risk of being subject to a higher tax rate if delayed.
CHANGES TO ORDINARY INCOME AND CAPITAL GAIN TAX RATES Earlier proposals had included higher tax rates on those with income over roughly $400,000 beginning in 2021. Those were all removed from the most recent version of the BBB, and it seems very unlikely they return in a revised form of this bill next year. • As a result, the vast majority of taxpayers should not be concerned about a tax increase next year. The latest proposals are targeted at those with significantly higher levels of income than were originally proposed.
ESTATE TAX CHANGES Early versions of the BBB included several significant changes to the current estate tax system. The majority of those were eventually removed – including a cut in the estate tax exemption, loss of basis adjustments at death and limitations on grantor trusts – and are unlikely to return in a new bill. However, the estate changes currently scheduled to happen in 2026 still exist, so those who were contemplating estate planning moves this year should continue to discuss those with their attorney