2021-2022 Tax Planning Guide

Welcome to the 2021 Tax Planning Guide. Back in April, the Biden administration proposed some of the most sweeping changes to the Internal Revenue code in the 70+ years that Petrinovich Pugh & Company has been a firm. If enacted, they would have a substantial impact on many of our clients and their families. However, none of the Biden proposals have yet been approved by Congress. More recent “frameworks” look significantly different and can change daily, even hourly, so we will need to be vigilant in continuing to monitor the breaking news from Washington.  

Given all this uncertainty, there are still things to contemplate through the end of 2021:  

Sell or hold appreciated investments?  Biden’s proposal is to eliminate lower tax rates on long-term capital gains, with the income taxed at ordinary rates, if the taxpayer’s adjusted gross income is over $1 million. The effective date of this change would be, apparently, April 2021, although the proposal is unclear. Note also that the same $1 million limit would apply to both married and unmarried taxpayers, and as such would be a new form of “marriage penalty.”  

Accelerate income into 2021, and defer expenses into 2022?  This could be beneficial if income tax rates increase in 2022, as Biden has proposed.    

Complete any contemplated like-kind exchanges of real estate in 2021?  Starting in 2022, gain deferral under a like-kind exchange would be limited to $500,000 per taxpayer or $1,000,000 for a married couple filing jointly, with any excess gain immediately subject to capital gains tax.  

Make substantial gifts to family or friends?  The Biden proposal would make gifts in excess of an exclusion of $1 million per-person a “realization event” starting in 2022. This means that a gift of appreciated property would be treated as a taxable sale, immediately subject to capital gains tax to be paid by the donor.   

Revise estate plans?  Under current law, a taxpayer’s heirs who inherit property get a step-up in income tax cost basis. The Biden proposal would make a taxpayer’s death a realization event, and in most cases appreciated property would be immediately subject to income tax on the capital gains over $1 million. Presumably, the $1 million gift and estate capital gain exclusions would be “unified.”  

California considerations:  If Biden’s proposals are enacted at the federal level, the Democrat’s super-majority in Sacramento might look to enact parallel provisions at the state level.  

Finally, please keep in mind that since Biden’s proposal was formally announced, the conversation in Washington has moved in a different direction, and much has changed—and likely will continue to change—in the weeks and months to come. We encourage you to contact us to develop an action plan as news develops and 2022 approaches.