Advisors consider year-end tax measures for 2021
With only a few weeks left in 2021, financial advisers are considering year-end tax measures for their clients while the federal government …
With only a few weeks left in 2021, financial advisers are considering year-end tax measures for their clients while federal lawmakers mull tax changes.
While there are some classic actions to take, like asking clients to top up their investments in tax-sheltered accounts, this year is slightly different as budget negotiations in Congress may result in code changes. taxes.
But tax experts say they are not too concerned about these discussions. “Everything is on hold right now… and it’s hard to predict what’s going on there,” says Tim Steffen, director of tax planning at Baird.
He cautions advisers against making decisions for client portfolios based on ongoing discussions in Congress. “You don’t want to do anything now that you can’t undo later,” he said. “You don’t want to commit to a particular strategy because we just don’t know what’s going to happen. ”
Take these steps to put your customers in a good position no matter what the future holds.
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Gather documents to take a holistic approach
Financial advisers should ask clients to put all of their documents and information together and use a holistic approach to determine where clients stand in terms of income, withholding taxes, potential capital gains, and plan contributions. retirement, says Steffen.
The pandemic has affected people differently in terms of income. Some clients may be unemployed for a year and have just returned to the workforce. So this year could be a low income year, while next year their income will be higher. Some clients may have decided to retire this year and their income will be lower next year. Understand where the customer is in terms of revenue this year versus next year, Steffen says.
Advisors should use this time of year to take a holistic, multi-year approach to taxes, rather than just thinking about the usual steps to take, says Kevin Swanson, CEO of Potentia Wealth.
Swanson works with a client’s tax preparer to review the client’s short and long term plans.
“A tax preparer will take a look at how we’re lowering your taxes today. As a financial planner, what we envision is potentially eight to ten years or more into the future, ”he says. “And this conversation together allows us to have discussions about the time horizon, when we will use the money, what kind of gains we will have in the future and whether we should reap losses this year or not.”
Its approach to harvesting tax losses depends on when its clients expect large gains, such as after selling a business. In this case, customers will want to save losses to help offset those larger gains.
[Read: Advisors — Have a Tax Management Plan for Portfolios]
Review retirement accounts
If customers can afford it, they can top up their tax-sheltered retirement accounts, such as 401 (k) or traditional individual retirement accounts.
One of the tax strategies that could be on the chopping block for next year is the Roth IRA backdoor conversion. This strategy allows high net worth individuals whose income is too high to contribute directly to a Roth IRA to bypass these income limits. “If you’re someone who’s traditionally done a Roth conversion through the backdoor, you’ll want to do it before the end of the year,” says Steffen.
Look at the inheritance tax exclusions
Advisors to high net worth clients may want to start planning for changes to the exclusion of inheritance tax, says Dean Borland, private wealth advisor at FineMark National Bank & Trust. Currently, approximately $ 11.7 million per person is excluded from inheritance taxes. That high level expires at the end of 2025 and is expected to be halved or more, depending on whether or not President Joe Biden’s administration targets this tax break.
A family’s willingness to create a trust to protect money depends on their time horizon and financial situation, Borland says.
If clients are to live longer than 10 years, says Swanson, “we are not going to rush into an irrevocable trust that will lock them into something today when they might have better opportunities in the future.” He adds, “If we think we are approaching that 10 year period, then we can start to look at what type of estate tax planning we can do to help reduce this tax impact for their beneficiaries in the future.
[READ: What Advisors Should Know About SLATs.]
Make tax-smart charitable contributions
Steffen says taxpayers can make a charitable contribution of $ 300 in cash ($ 600 for married people filing a joint return) this year and receive a tax deduction, extending the benefits for charitable donations introduced for the first time last year as part of the coronavirus stimulus package.
However, for larger donations to be tax deductible, taxpayers must itemize rather than take the standard deduction, which for married couples jointly filing is $ 25,100. People can only use tax deductions to offset $ 10,000 of the standard deduction. The rest must come from other withdrawals. For most people, it’s mortgage interest and charitable donations.
This is where multi-year planning comes in, says Steffen. Some people may try to “bundle” the charitable contributions they would normally give over several years into a single year to exceed the standard deduction threshold. Donor Advised Funds are one way to implement this pooling strategy, so clients can put those donations into a fund and then distribute the money to charities over time.
Another option is the remaining charitable trusts. However, Swanson says charitable residual trusts are best for people who are already philanthropic, have made big gains, and would like to take it as a tax benefit this year, rather than using a multi-purpose tax shelter.
Benefit from the exemption from donation tax
Borland suggests advisors take advantage of the annual gift tax exclusion for high net worth clients. The exclusion allows customers to donate up to $ 15,000 to another person without paying tax on the donation. “If a couple has a child, they can actually give that child $ 30,000, $ 15,000 from each parent,” he says. The $ 15,000 gift is not limited by family situation; it can go to anyone, he adds.
Don’t forget RMDs, filing status updates
Steffen says advisers should remind clients aged 72 or older to take their minimum required distributions, which were suspended last year.
Additionally, advisors should ask clients if their filing status has changed. People who are married, divorced, or have a deceased spouse will likely be in a different tax bracket. “The tax rates in brackets are so different for a single person than for a married couple,” he says.
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Advisors consider year-end tax measures for 2021 originally appeared on usnews.com