These are the top 5 tax moves to make for your clients

December 28, 2021 5:01 AM

When it comes to taxes, investors and their advisors have been on a roller coaster this year, careening through a legislative funhouse of trapdoors and hidden surprises. Best stay buckled in, because the wild ride is continuing into 2022.

What began in 2021 as a push by the Biden administration to raise rates on the wealthiest Americans has gone through head-spinning reconfigurations. Gone are the White House’s original proposals to hike the top individual rate to 39.6% on people making at least $400,000 a year and nearly double the capital gains rate for those making at least $1 million. Gone is the administration’s call to end the ability to inherit assets with more than $1 million in appreciation without paying tax.

What’s now in place is a slightly kinder and gentler $1.8 trillion tax-and-spending bill passed by the House of Representatives in November. The Build Back Better plan, which itself went through substantial changes last fall, calls for a new 5% to 8% “surcharge” on millionaires. But it’s all on hold until the new year, amid opposition in the Senate.

That doesn’t mean it’s time to sit still, even with only a few days left in 2021.

“We follow an annual financial planning calendar and discuss tax planning with clients in the fourth quarter of each year,” said Jeffrey Nauta, a principal at Henrickson Nauta Wealth Advisors in Belmont, Michigan. “That review includes a current-year tax projection along with any scenarios that could provide tax savings.”

Despite the uncertainty, there are still a few safe moves to make before 2022. Here are the top five:

Harvest tax losses

Investment losses are always painful, but they have a bit of a silver lining.

Tax-loss harvesting

involves selling a stinker of a stock, fund or other asset that has declined in value and reinvesting the proceeds in another asset. You can use up to $3,000 a year in capital losses to offset, or reduce, taxable gains in other parts of your retirement portfolio. Got more than that? You can roll the unused gains forward to future years.

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Convert to a Roth IRA

Build Back Better seeks to ban so-called mega backdoor Roth conversions, in which an investor can put as much as $58,000 a year into a 401(k) account and convert much of the money to a tax-free Roth account. Had the Senate passed it, the conversions would have been outlawed come Jan. 1. With the legislation set to be taken up again in the new year, a ban may still materialize. It’s unclear whether it could go into effect retroactively.

Meanwhile, investors can still do regular Roth conversions. Those involve taking money out of a taxable retirement account like an IRA or 401(k), paying income tax on the gains, then putting the proceeds into a Roth, where they can grow free of tax.

If the legislation passes, investors would be banned from the strategy come 2032 if they’re high earners.

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Here's why millions of affluent investors can relax about the tax bill

Set up a grantor trust

Last October, grantor trusts, workhorses of estate planning for the wealthy, were on the chopping block. An early version of Build Back Better treated future sales between trusts and their owners — a common planning technique — as a taxable sale. The legislation now before the Senate and the Senate own’s ongoing revisions, don’t contain that proposal. Meanwhile, top wealth managers are fond of a type of grantor trust known as a spousal lifetime access trust. A SLAT has major benefits for high net worth couples: The ability to whisk assets out of their taxable estates while still benefiting from them during retirement.

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SLAT is tax ‘acronym du jour’ for the married and wealthy: What you need to know

Donate stocks, not cash

$100s with blue stripes giorgio trovato on unsplash.jpg

Surprisingly few big earners appear to know that giving stock is immediately more valuable than sending cash, both for the giver and for the charity. Donating appreciated shares after holding onto them for at least one year means no capital gains tax or any state levies on the profits. Best of all, donors can write off the full fair market value of the donated securities, not just what they paid. The deduction reduces taxable income, which decreases the amount of money an investor sends to the IRS that year. For both the donor and the nonprofit, it’s a bigger bang for the buck compared to giving cash.

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'Personal finance secret': Donating stock is more lucrative than giving cash

Catch up on contributions

Investors are historically prone to what’s known as

present bias

— the tendency to go for a smaller reward now (spend now) rather than to wait for a larger reward later (sock extra money away in a retirement plan). Most taxpayers have until Dec. 31, or until their last paychecks before the new year, to contribute to their 401(k)s. For 2021,

the limit

is $19,500. But those age 50 or older can kick in an additional $6,500, for a total $26,000 (all deductible). Combined, you and your employer can put in a maximum

$64,500

, an amount that includes the catch up. The rewards can be big; John Hancock Retirement Services has a calculator

here

.

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IRS ups 401(k) contributions to $20,500