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December 6, 2021
clock 22 MIN READ

Dean Mioli, Director of Investment Planning, and Steve Wittenberg, Director of Legacy Planning, return for a discussion around year-end tax planning tips. They sit down with Leslie Wojcik, Head of Global Communications, to remind us there’s no need to act like a “deer in headlights” when it comes to the new tax bill. 

“Year-end is just around the corner and…we have some solid tax planning ideas that should be discussed with your financial advisor and your tax advisor.”

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Speaker 1:    Hi, everyone. Thanks for joining us back at The Intersection, a podcast that brings you candid conversations with members of our community and leaders in our industry. Enjoy today's episode.

Leslie Wojick:    Hello and welcome. I'm Wojick, head of global communication at SEI, and today we're chatting with director of investment planning, Dean Mioli, and our director of legacy planning, Steve Wittenberg, and they're back to discuss tax planning.

All right. So earlier this year we did two episodes that included discussions around the potential effects of proposed tax legislation. It's now November and we just learned the House passed the Build Back Better Plan and sent it to the Senate. Steve, what's next when it comes to tax legislation?

Steve Wittenberg:    So Leslie, it was a tenuous summer and into the fall, and we didn't know what was going to happen. Clients were clamoring for information. We saw the infrastructure bill pass, and yes, hot off the presses, the build Back Better Act passed overnight in the House, but it's still an uphill battle in the Senate.

We'll have to see over the next couple weeks what gets done and what sticks in the bill, but so far, there is silence about many of the tax concepts that were built into the prior budget bill. Most of these concepts were concerning to many wealthy taxpayers, many of our clients, but we're going to stress today that we don't read their absence from this document as a guarantee that they're off the table.

Until the bill is signed by President Biden, anything can go. At this point, I'll say the highlight of the bill according to President Biden this morning is that no one earning under $400,000 will pay more federal taxes.

Leslie Wojick:    Dean, you wrote a blog post recently that reminds us that there's no need to act like a deer in headlights when it comes to a new tax bill. What can people be doing now to prepare?

Dean Mioli:    Great question. Year end just around the corner, a couple of things we're going to talk about today are regardless of what's going on in Washington, we have some solid tax planning ideas that should be discussed with your financial advisor and your tax advisor.

No reason to freeze. It's still a time of discussion and reflection on what makes sense before year end. The things we're going to talk about today are solid from a tax planning perspective regardless of what's going to happen in Washington. So that's the whole point. Don't be frozen by the political situation which is more fluid than home heating oil right now.

Steve Wittenberg:    So Dean, I do want to start by reminding all of our listeners that all the tax planning concepts that we talk about should be discussed with your tax professional. Dean, you're the expert around the income taxes, but everybody who's listening should definitely talk to their tax professionals before making a move as part of their plan.

Leslie Wojick:    When it comes to year end tax strategies, how have your viewpoints evolved since the last time we talked?

Dean Mioli:    Well, a couple of them I still believe are completely solid, but one idea I'll get into a little later may need to be new nuanced. I was big on accelerating income into this year over the summer when we had the podcast. Now I have to change my response to that and say it needs to be a little bit more nuanced and it's all about timing.

But my number one planning idea for '21 is the Roth conversion, which is taking a traditional IRA and converting that to a Roth. And I still think this is a tremendously solid idea that certainly you've got to run the numbers, but the most important number when you're contemplating a Roth conversion is what's my tax rate today, what do I think my tax rate's going to be in the future? Because if you hold down investment costs and investment returns being the same now and in the future, the big factor is the tax. And if you can say with high probability that my tax rate's staying the same or higher, you should be looking at Roth conversions. No doubt about it.

The only people who shouldn't be looking at them is if you're going to say my tax rate's going to lower in the future, then why would you do a Roth conversion? And there's so many benefits to the Roth. Namely, one, there's no required minimum distributions. Okay. That's a nice thing. Of course when your kids inherit or your grandkids inherit it, they will have to take distributions, but most of them will be under what's known as the 10 year payout period, but they could wait until the 10th year to touch it, so they can have 10 more years of tax re-growth.

There's a lot of great reasons to be thinking about the Roth conversion. Of course, you have to do that by December 31st. And let me tell you now, in this latest iteration of the Build Back Better Act, they are looking... And this was just put back in. It was in, it was out, now it's back in. This is the fluidity of this situation, is they want to shut down the backdoor Roth conversion as of 1.1.22. Now, quickly, what a backdoor Roth conversion is, is taking a non-deductible IRA contribution and converting that to a Roth. Now, typically that wouldn't have any tax consequence to it.

Now that's a very simple way I described it. It could be a little bit more complicated upon your situation, but that, in the essence, is what a backdoor Roth is. And as of right now, come 2022, that's off the table. So this could be the last chance to do a backdoor Roth is in 2021.

Steve Wittenberg:    Dean, and I just wanted to put out there that the Roth conversion is a great idea, but it's not going to be for everyone. You're not saying everyone should go out there and convert to a Roth. There are certainly situations where I've seen clients run the numbers and it just doesn't make sense for them. The younger you are, I think it could make more sense, the outlook that your taxes would go up over time would make more sense, but we certainly... I know recently I had an older client who, when we ran the number, it wouldn't make sense unless he thought he was going to live to be 102 years old. And he said, "I love to know that that's going to happen," but there was too many factors and he decided not to do the Roth conversion, but it is still a really powerful plan for many, many individuals right now.

Dean Mioli:    Absolutely. And it may not be for the people who do the Roth conversion. It could be really about how do I pass my wealth onto the next generation. So it might not make sense for someone who doesn't have children or grandchildren because, as you said, a 100 year old person, but if they think that that money could eventually go to their kids or grandkids, you have to look at it this is a multi-generational idea, the Roth conversion. It's just not about the person who's converting.

Leslie Wojick:    Staying on this year end strategy topic, Steve, what are some charitable giving strategies that people could be thinking about?

Steve Wittenberg:    So, Leslie, we were talking about how our viewpoints have evolved since the last iteration of our podcast. Dean mentioned on the income side, but now we want to hit it on the deduction side. Typically we want to bring deductions forward. Last time around, we were saying, "Hey, start deferring some of these deductions for a potential higher tax rate in the future," but with tax rates not being attacked as much in the new bill or even increased that much at all, we're back to our old school thinking, which is bring deductions to the current year.

Now, what kind of deduction are we talking about? I know, Dean, you're going to comment in a second about the state and local tax deductions, but charitable deductions are huge, a huge planning opportunity. There's a few ideas out there that I really like and that we see a lot of.

First off, there's been a nice little tax break out there since 2020, which is making a 100% or you get a 100% deduction against your adjusted growth income for cash gifts directly to a qualified charity. These are qualified charitable distributions. Now, typically this is a 60% cap against your AGI, but this is a tax payer friendly rule that's extended through 2021. If you want to offset 100% of your income and you're itemizing your deductions, you can do that through cash gifts to the qualifying charities.

Now these charities can be found on the IRS website. There's a broad definition of what a qualified charity is. You can look it up in an IRS database, but that's a really good planning opportunity certainly, making charitable deductions. If you do not use the deduction all in this year, it's going to be a carry forward anyway. So it's a really interesting idea.

Along those lines, I think, Dean, you see a lot of that.

Dean Mioli:    Oh, Absolutely. We recently put out a paper about year end charitable giving. And to expand on Steve's point because this is one of the things we are certainly on board about, is accelerating deductions into this year, and just tying a couple of concepts together and we'll go further on charitable, but let's say you're thinking about doing a Roth conversion this year, let's say a $30,000 Roth conversion, well, if you're charitably inclined, you could accelerate your charitable deductions this year, elect to treat those charitable contributions for the 100% AGI limitation. That charitable contribution will offset the Roth conversion income. So now we're combining tax strategies, a tax savings powerhouse, baby. This is great tax planning that you can bring two ideas together like this. Back to you, Steve.

Steve Wittenberg:    Yeah, so I talked about cash gifts, but we are still in the middle of this unprecedented bull market run in the stock market and I know a lot of people out there have equities with built in gains, huge built in gains and they don't want to have to pay taxes on those gains, but they're very charitably inclined. So it's worth looking at donating some of these equities, some stock to a charity, avoid the capital gains and get a deduction to boot.

Running the numbers will be important here, what's the most bang for your buck, giving an equity versus giving a hundred percent cash. The equities will have some sort of caps of how much you could offset, but it's still a good plan that we see with a lot of our clients.

And, there's a third idea out there that, Dean, this is your bailiwick here, talking about donor-advised fund. I, I know you see a lot of them and I do as well, but how do you feel about donor-advised funds this year?

Dean Mioli:    We're seeing tremendous use of the donor-advised fund. And to your point, Steve, when you gift appreciated securities to a charity or to a donor-advised fund, you get a twofer. One, you got out of the gain, so you didn't have to pay taxes on the gain, plus you've got a charitable deduction. So that's pretty powerful. And as you mentioned, asset prices are up. I don't care if you're talking about real estate, I don't care if you're talking about stocks, bonds, mutual funds or even Bitcoin, I mean, there's a lot of things that are up in value and there's a good chance to take advantage of that.

And a lot of people, especially year end where they're contemplating all this stuff around the holidays, they just don't have the mindset to say, "Well, who should I benefit with this charitable contribution?" So they might need like a charitable way station. So you donate it to the donor-advised fund by year, get the tax deduction, and then in the future they can decide what charities should benefit from those charitable contributions. Right?

Once the money's in the donor-advised fund, it grows tax free. You could have your other family members as successor directors. It really is a tremendous planning vehicle that should be discussed with your clients.

And again, what we're trying to do with this donor-advised fund, and I'll make it into a strategy real quick, is that most Americans, over 90% of Americans struggle to itemize their deductions because of the tax [inaudible] changes that took place in 2017. But there's an idea that we have, it's called the lump and clump. So let's say this year you're trying to itemize your deductions, and for a married couple, the standard deduction is $25,100. So to itemize, you must exceed that number.

So let me give you an example where someone this year, a married couple projected $22,000 of itemized deductions. Obviously they're falling short of the standard deduction, so they'll take the standard deduction, but in that $22,000, they gave $5,000 to charity. So to your point, Steve, earlier about accelerating deductions, why don't I grab my charitable contributions that I would've made in '22 and '23 and '24 and pull them into '21? That's the lump part, lumping the charitable contributions into one year. The clump part would be putting it into a donor-advised fund. So now you'll blast through that $25,100 standard deduction because now instead of giving $5,000 ti charity, you just gave $20,000, okay? So now you're up close to $40,000 in itemized deduction. So you get the full benefit of your charitable deductions.

So it's not only something to feel good about, right? But you're also being really tax smart. But you might not be able to figure out who's going to get $20,000 of contributions. Put it in its donor-advised fund to start, and then at later time, you can decide what charities should benefit from that. We call that the lump and clump and that's a really tax smart move.

Leslie Wojick:    Dean, Steve has referenced this a little bit ago regarding the SALT deduction and that the current version of the tax bill increases the cap on the state and local tax deduction from $10,000 to $80,000 starting in 2021 through the end of 2030. Why is that important?

Dean Mioli:    This is a really interesting area, Leslie, because it's certainly something on the Democratic side they really wanted to change because it's not a secret that New York and California are very Democratic states. And of course they also have very high taxes in New York and California, amongst other states. And the fact that the House is essentially controlled by the Democrats, they were looking to make this increase happen.

And certainly $80,000 is a lot better than $10,000, but I don't think we know all the details here just yet. As good as that sounds, and it does sound pretty juicy, there's a very good chance that they might make an adjustment to the calculation for alternative minimum tax. Now, let me just say this. When they did The Tax Cuts and Jobs Ac of 2017, the amount of people we've seen in AMT since then, you have a better chance of fighting Bigfoot than someone paying AMT right now. It's just like no one's paying AMT. But what they're going to do since we do have this dual tax system is there's very likely they could make a change to the way that alt min is calculated. So you would get this deduction for regular tax, but then lose it for the AMT.

And I don't think a lot of people understand our tax system well. It's a little complicated, and then certainly Senator Sanders has made it clear that he thought this was too big of a write-off for the wealthy and they might try to put some kind of income limitation on it or they might try to do something with the AMT.

So as to Steve's point earlier, there's going to be changes to this tax bill in the Senate and we're going to have to see how that evolves over the next few weeks. But certainly I think that's catching a lot of people's attention, is the fact that more state and local taxes can be written off, but who actually will benefit has yet to be determined.

Leslie Wojick:    I have to admit, I've never heard anyone work in a reference to Bigfoot while talking about tax planning. That was very impressive, Dean. Let's close with a focus on estate planning. Steve, what kind of updates do you want to highlight?

Steve Wittenberg:    Well, back when we did the podcast or earlier this year, the sky was falling. We were really nervous about major changes to the estate tax regime, and I'm going to highlight a few that aren't happening as a result of what's in the bill right now. But it's important to note that we often throw out the phrase tax and we don't even say to some of our clients, "Well, what kind of tax are we talking about? Income tax, estate tax, gift tax?"

The truth is a lot of people don't realize the interplay between income taxes and the impact on estate planning and estate taxes. When we set up various trusts called grantor trusts, the income tax consequences of those trusts passed back to the grantor or the creator. Grantor trusts are an estate planning tool, but the income taxes come into play here because that granter is going to be paying the income taxes on the trust income and that could ultimately impact how you decide on creating trust and how much to fund the trust with.

Now, something that is in the bill right now that we are paying attention to is a surtax on trust, an income surtax on trust income. Now we're assuming that this is on what's called non-grantor trust, but we have to see how this hashes out in the Senate. But what we're seeing is that income in a trust, adjusted gross income of over $200,000 is going to have a 5% surtax, and you could add on another 3% surtax for income over $500,000. Now that's pretty meaningful because we know there are some very large trusts out there throwing out a lot of income, and that could change the focus on how we view estate planning and will cause some additional calculations to be done of what's the benefit of creating these trusts to avoid estate tax just to be hit with a somewhat significant income tax.

So that being said, there have been notable exclusions from this, I'll say final, but close to final budget bill that we thought were going to kick in or possibly kick in when we talked earlier before. First off, it looked like there was a chance that they were going to eliminate grantor trusts, what I just mentioned. Grantor trust have a really powerful purpose with estate planning and income tax planning. No elimination of grantor trust.

Secondly, the estate tax exemption, which is $11.7 million per person, was possibly going to be cut in half and be brought down to around $6 million. That's off the table right now. Now, I say it's off the table. It's still scheduled to be cut in half at the end of 2025. So we'll see what happens over the next couple years if they turn back to try to bring forward some of those exemption changes.

There was a concern that there was going to be an elimination of step up in basis at death of your assets that has been eliminated from the bill.

And further, there was an attack on valuation discounts on gifting certain types of assets. We don't see any of that language in the bill right now.

So in the end, planning is what it's always been. We don't love planning just for taxes. We always say plan for your goals. The joint exemption is still available though. $23.4 million of exemption is powerful as a married couple. We know the exemption is scheduled to be reduced in 2025 anyway. Continue down the plan of gifting away if you could afford it. If you have excess wealth and you can give it away either in trust, irrevocable trust or to your beneficiaries, you should strongly consider that and use some of your exemption while it's available.

We also have annual exclusion giving. Now it's currently $15,000 per year, $30,000 per couple. It's going to go up for inflation to $16,000 as an individual, $32,000 per couple. You could give that to anyone every year. That's a powerful tool to reduce your estate.

We certainly see uncertainty into 2022. We've got midterm elections. We do have concerns over, if the laws change, whether they would be retroactive. Retroactive estate law changes are rare, but it's still worth keeping in mind. So we don't want to look forward and wake up in mid to late 2022 and have that concern in mind.

We've been talking about planning and estate and income tax changes in 2020 and 2021. We're going to talk about it again in 2022. So it's never a better time in the present to try to lock some of your goals by gifting and executing on the plan that you want. Use the exemption and exclusion if you could afford it. If your facts and circumstances dictate it, try to lock a grantor trust now for future use. This could be beneficial just in case something makes its way back into the bill that doesn't allow for use of grantor trusts in the future.

Dean Mioli:    A few things because we're talking about year end, but there's a couple things I'd like to talk about for the beginning of the next tax year, which is 2022. One is that the amount you can put in your 401(k) plan or 403(b) plan has been increased by $1,000. So instead of $19,500, next year it goes to $20,500. Now of course if you're 50 or over, there is a catch up amount you can't put in. That has not changed, which is $6,500. For IRAs, there was no change from this year. So it's $6,000 if you're under 50, and if you're over for 50, 50 or over, you can put an extra $1,000 in. 

Now, for people that are taking required minimum distributions starting next year, okay, there is something called the qualified charitable distribution, the QCD. Now the reason I bring this up is that, again, as many tax payers struggle to itemize, if you're over 70 and half and you might not need your RMD for cash, one thing you can do is gift up to $100,000 of your RMD directly to charity. And there's some nice tax benefits to that because whatever you give to charity that's part of your RMD, you don't have to pick up his income.

So that's a great tax planning idea. And it's only eligible for people 70 and a half or over, but I would caution you to do that early in the year because the first money out of an IRA is the required minimum distribution. So if you're going to do the QCD, I recommend you do it early in the year, because if you pay out your RMD and put it in your pocket and then you decide to do a QCD, you're not going to help yourself from an income tax perspective. So keep that in mind, that if you want to do the QCD, do it in January or early in the tax year.

And I would advise all that if you're interested in retirement savings and you want to fund an IRA, why not do it early in '22? Why wait 15 months and do it in March or April of '23? Get that money in because that's long term investment money. Get it in early. There's no reason to wait 15 months to make an IRA contribution.

So just a couple of tax tips that get you started for 2022.

Leslie Wojick:    Well, I have to say you guys certainly packed a lot of insight into this conversation and so very much appreciate you guys coming back to share and really look forward to having you back in 2022 to see how things shake out.

Speaker 1:    Thanks so much for joining us today. Stay tuned for more conversations with members of our community. Until next time, stay well. And of course, we hope you'll meet us back at The Intersection soon.

Speaker 5:    Please note that an individual can make 2021 IRA contributions until April 15th, 2022. A grantor trust is a trust in which the individual who creates the trust is the owner of the assets and property for income and estate tax purposes. Grantor trust rules are the rules that apply to different types of trusts. Grantor trusts can be either revocable or irrevocable trusts. An irrevocable trust refers to a type of trust where its terms cannot be modified, amended or terminated without the permission of the grantor's beneficiary or beneficiaries.

The 2017 Tax Cuts and Jobs Act was signed into law in 2017 and nearly doubled the standard deduction amount. Approximately 90% of Americans now claim aim it rather than itemize their deductions. Source, CNBC, Smart Tax Planning, April 9, 2020.

Neither SEI nor its subsidiaries provide tax advice. Please note that any discussion of US tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties.

This communication was written to support the promotion or marketing of the matters addressed herein and you should seek advice based on your particular circumstances from an independent tax advisor.

This material represents an assessment of the environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the listener as research or investment advice. This information is for educational purposes only and should not be interpreted as legal opinion or advice.

Neither SEI nor its subsidiaries provide financial estate planning or tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. 

Neither SEI nor its subsidiaries provide estate planning services unless you have otherwise separately entered into a written agreement for the provision of certain estate planning services.

This material represents an assessment of the environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the listener as research or investment advice. This information is for educational purposes only and should not be interpreted as legal opinion or advice nor a substitute for thorough estate planning and is not meant to be legal and/or estate advice. Please consult your legal counsel and financial professionals for additional information. Investing involves risk including possible loss of principal. 

Dates and deadlines can vary from investment to investment and firm to firm. Please check with your financial, tax, and legal professionals regarding any suggestions contained herein.

Qualified Charitable Distributions:

  • If you wish to donate Required Minimum Distribution (RMD) to Charity, please note:

    • Must be age 70 ½ or older

    • Up to $100,000

    • A Donor-Advised Fund is not a qualifying charity.

    • Make sure the tax preparer knows that the QCD was made.

    • An RMD that is a QCD, the taxpayer does not pick up the income but also does not get the charitable deduction.

  • Also, keep in mind IRA Distributions are taxable:

    • Income taxes on Social Security benefits can increase,

    • Adjusted gross income (AGI) limitations on annual charitable deductions can defeat current deduction of the charitable contribution of IRA distribution proceeds (carryovers to a limited number of future tax years is available),

    • AGI limitations trimming itemized deductions can apply, and

    • Medicare insurance premiums can increase.

  • Find additional resources at  

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