In recent months, lawmakers have introduced a flurry of tax law proposals in Congress aimed at funding an expansion of federal infrastructure and social programs. Most recently, the House Ways and Means Committee released draft legislation containing provisions that would impact the tax situations of individuals and families in several material ways. Specifically, that plan outlined some potential changes in personal income taxes, including raising the top marginal rate and increasing the capital gains rate. The broad draft legislation also included a dramatic reduction in the lifetime estate and gift tax exemption—cutting it in half from its current level.
None of these proposed changes have been passed into law as of yet, and they could be significantly changed before that happens—if it happens at all. While year-end planning can be difficult with so much up in the air, we are advising our clients to be aware that changes could occur soon and to consult with their accountant and/or estate attorney to identify potential actions that should be taken before year-end to be better positioned should those changes take place.
Regardless of when (or whether) these tax law changes come to pass, the end of the year is often a critical time for many clients from a financial planning perspective. As we approach the end of 2021, there are several important year-end planning actions you should take or at least consider.
First, be sure to satisfy all annual Individual Retirement Account (IRA) required minimum distributions (RMDs) to avoid unwanted penalties (failure to satisfy the requirement results in a 50% penalty on the amount not taken). Last year, these distributions were not required on account of the pandemic, but this year RMDs must once again be taken by all persons 72 or older. Our team has already begun coordinating with those clients who must complete distributions for the 2021 tax year and will be in contact with those who have yet to satisfy that requirement over the coming months. If you are a Westmount client and would like to complete this process sooner, please contact your advisor. Also, please make sure we are aware of any other IRAs you may hold, as those accounts will impact the calculation of the amount you must take this year.
Next, if you are charitably inclined, making donations to organizations that are important to you is a wonderful way to support the communities in which we live and work, while also deriving helpful tax advantages in the process. Many donors assume the best way to do this is with cash donations; in most situations, however, we recommend using other strategies that can provide more economic value. For example, if you itemize deductions on your tax return, using appreciated securities is a tremendous and tax-efficient method for completing charitable gifts. Not only does the organization benefit from your generosity, but you, as the donor, receive a charitable deduction for the tax year in which the gift was made. In addition, by donating the asset to a charity you remove it from your investment portfolio and eliminate any future liability for being taxed on the as yet unrealized appreciation.
For those over the age of 70 ½ and who hold an IRA account, Qualified Charitable Deductions (QCDs) are another option. A QCD is a direct transfer of funds from an IRA to a qualified charity. QCDs can be completed in amounts up to a total of $100,000 per year and, importantly, can satisfy the annual required minimum distribution from the IRA. Beyond the benefits of making the gift to a charity, the QCD amount is excluded from your taxable income for that year, unlike regular IRA withdrawals, which are typically taxed as ordinary income. This reduction in taxable income may positively influence other aspects of your tax situation as well, such as social security benefits and Medicare premiums. As they are intimately familiar with your situation, your CPA can properly advise you if a QCD may be right for you. We can also help you determine the best way to optimize your overall charitable giving strategy.
Lastly, the end of the year is a wonderful time to revisit other financial decisions as well such as beneficiary elections, employer-based retirement plans, tax withholding amounts. It’s also an ideal time to check the status of your liquid emergency reserves, insurance coverages (home, life and auto) and education account funding. Please contact us to conduct a full review of these items.
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This article was prepared by Westmount Asset Management, LLC (“Westmount”). Westmount is registered as an investment advisor with the U.S. Securities and Exchange Commission. The information contained in this article was prepared using sources that Westmount believes are reliable, but Westmount does not guarantee its accuracy. The information reflects subjective judgments, assumptions and Westmount’s opinion on the date made and may change without notice. Westmount undertakes no obligation to update this information. It is for information purposes only and should not be used or construed as investment, legal or tax advice, nor as an offer to sell or a solicitation of an offer to buy any security. No part of this article may be copied in any form, by any means, or redistributed, published, circulated or commercially exploited in any manner without Westmount’s prior written consent.
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