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Alerts and Updates

2021 Year-End Tax Planning Guide

December 15, 2021

2021 Year-End Tax Planning Guide

December 15, 2021

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The Build Back Better reconciliation bill, which currently includes more than $1.5 trillion in individual, business and international tax increases, has passed the House and is under debate in the Senate. We have summarized the proposed tax increases being considered throughout this guide.

Important Tax Planning Strategies for an Uncertain Year-End and Year Ahead

It has been a long and tumultuous year. The economy, country and world continue to regain their footing as the waves of the coronavirus pandemic, including the new omicron variant, hopefully subside. Adding to these challenges is Congress and its inability to agree on long-discussed tax legislation. As we enter the holiday season after another challenging year, we hope that you, your family and all of your loved ones are safe and healthy and can find some light in this season.

Though we entered 2021 with a myriad of concerns related to the pandemic and government stimulus circulating and propping up the economy, and seem to be ending the year with similar uncertainty, life is doing its very best to regain some sense of normalcy, though it remains a far cry from this time two years ago.

As we near the end of the year, there is still time to position yourself to take advantage of the opportunities afforded under the current tax law before year-end to reduce your 2021 tax liability. Our 2021 Tax Planning Guide highlights select and noteworthy tax provisions and potential planning opportunities to consider for this year and, in some cases, 2022, both with tempered caution and balance this year.

On November 19, 2021, the House voted 220 to 212 to pass the Build Back Better reconciliation bill, which currently includes more than $1.5 trillion in individual, business and international tax increases. The Senate is debating this bill at the time of this writing. We have summarized the proposed increases being considered throughout this guide.

With all of the recent focus on the Build Back Better Act, one can nearly forget that 2021 saw the passage of two other COVID-19 relief laws, each containing noteworthy tax provisions. In March, we saw the passage of the American Rescue Plan, which significantly expanded the child tax credit, the dependent care credit and the dependent care FSA contribution maximum, along with a third round of stimulus payments and a number of other benefits designed to help working families. More recently, on November 15, President Biden signed the Infrastructure Investment and Jobs Act into law, which primarily focuses on physical infrastructure spending. However, that act does include a few relevant tax provisions, including increased cryptocurrency reporting in an effort to close the tax gap, the early termination of the employee retention credit and expanded tax-exempt status for certain energy-related municipal bonds. You can read more about this in our related Alert.

Though the potential for significant tax legislation looms before the end of the year, we recommend the prudent approach of planning now, based on current law, and revising those plans as the need arises.

So, please check in with us and keep a watchful eye on our Alerts, which are published throughout the year and contain information on tax developments that are designed to keep you informed while offering tax-saving opportunities.

In this 2021 Year-End Tax Planning Guide prepared by the CPAs and attorneys of the Tax Accounting Group of Duane Morris, along with contributions from the trust and estate attorneys of our firm’s Private Client Services Practice Group, we walk you through the steps needed to assess your personal and business tax situation in light of both existing and potentially new laws and identify actions needed before year-end and beyond to reduce your 2021 and future tax liabilities.

We hope you find this complimentary guide valuable and invite you to consult with us regarding any of the topics covered or your own unique situation. For additional information, please contact me, Michael A. Gillen at 215.979.1635 or, John I. Frederick, Steven M. Packer or the practitioner with whom you are in regular contact.

We wish you a joyous holiday season and a healthy and successful new year.

Michael A. Gillen
Tax Accounting Group

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In addition to legal services, Duane Morris is a pioneer in establishing independent affiliates providing nonlegal services to complement and enhance the representation of our clients. The firm has independent affiliates employing approximately 100 professionals engaged in other disciplines, such as the tax, accounting and litigation consulting services offered by the Tax Accounting Group.

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The Tax Accounting Group (TAG) was the first ancillary practice of Duane Morris LLP and is proudly celebrating our 40th anniversary. It is one of the largest tax, accounting and litigation consulting groups affiliated with any law firm in the United States. TAG has an active and diverse practice with over 60 service lines in more than 45 industries, serving as the entrusted adviser to clients in every U.S. state and 25 foreign countries through our regional access, national presence and global reach. TAG continues to enjoy impressive growth year over year, in large part because of our clients’ continued expressions of confidence and referrals. To learn more about our service lines and industries served, please refer to our Quick Reference Service Guide.

TAG’s certified public accountants, certified fraud examiners, attorneys, financial consultants and advisers provide a broad range of cost-effective tax compliance, planning and consulting services as well as accounting, financial and management advisory services to individuals, businesses, partnerships, estates, trusts and nonprofit organizations. TAG also provides an array of litigation consulting services to lawyers and law firms representing clients in regulatory and transactional matters and throughout various stages of litigation. Our one-of-a-kind CPA and lawyer platform allows us to efficiently deliver one-stop flexibility, customization and specialization to meet each of the traditional, advanced and unique needs of our clients, all with the convenience of a single-source provider.

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Whether you are a client new to TAG or are among the many who have been with us the entire 40 years, it is an honor to serve you.

As another year draws to a close, we are once again inundated with calls, outreaches and multiyear tax modeling requests from existing and new clients regarding year-end tax planning strategies available to individuals, businesses, estates, trusts and nonprofits. With the possible exception of 2017, the current legislative climate has generated more anticipation and confusion regarding taxes than any year-end in a generation.

So while you can depend on TAG for cost-effective tax compliance, planning and consulting services, as well as for critical advocacy and prompt action in connection with your long-term personal and business objectives, we are also available for any immediate or last-minute needs you may have or Congress may legislate.

For much of this year, the legislative agenda has been focused on infrastructure, which President Joe Biden intends to be a hallmark of his presidency. In order to best accomplish his objectives, the massive infrastructure package was intentionally split into two pieces: a bipartisan “physical” infrastructure bill focused on repairing roads, bridges and expanding internet access, and a “human” infrastructure bill that focuses on improving social programs, supporting families and investing in energy projects. The physical infrastructure bill was signed into law on November 15, while the human infrastructure bill is embodied by the Build Back Better Act reconciliation bill the House passed in November and that currently awaits consideration in the Senate.

As the spending contained in the human infrastructure bill did not garner the bipartisan support of the physical infrastructure bill, the Democrats knew that they would likely have to pass this portion of the agenda without any Republican support. With a 50-50 Senate and Vice President Kamala Harris’ tie-breaking vote, the human infrastructure components have to be passed via a reconciliation bill rather than other legislative routes, as it would not obtain the 60 votes necessary to avoid a filibuster in the Senate. By utilizing the reconciliation process, the Build Back Better Act is subject to certain limitations, such as minimizing the impact the bill can have on the national debt. In short, the spending of the human infrastructure bill must be offset with corresponding revenue increases―i.e., tax increases.

As the bill needs to have complete Democratic support in the Senate, much of the year has been spent negotiating between the more progressive and moderate wings of the Democratic Party. Indeed, it has been a struggle to find common ground in a package that provides all of the “wants” of the progressives while reflecting the fiscal conservativeness of the moderates. So while the bill has passed the House of Representatives in a scaled-back version of its original blueprint from April, it is likely that the size and scope of the bill will undergo further modification and even limitation as inflationary pressures abound and the omicron variant spreads.

With the present scaling back of many provisions within the Build Back Better Act, and with only incremental and modest, yet important, tax changes likely for 2021 and 2022, the tried-and-true strategies of deferring income and accelerating deductions may be beneficial in reducing tax obligations for most taxpayers in 2021. However, with tax increases looming, whether incremental or otherwise, the better approach may be to “time” income and deductions rather than broadly deferring income and accelerating deductions. With minor exceptions, this month is the last chance to develop and implement your tax plan for 2021, but it is certainly not the last opportunity.

For example, if you expect to be in the same tax bracket in 2022 as 2021, deferring taxable income and accelerating deductible expenses can possibly achieve overall tax savings for 2021 and even for both 2021 and 2022. However, by reversing this technique and accelerating 2021 taxable income and/or deferring deductions to plan for a higher 2022 tax rate, your two-year tax savings may be higher. This may be an effective strategy for you if, for example, you have charitable contribution carryovers to absorb, or your marital status will change next year, or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation. Examine our “Words of Caution” section below for additional thoughts in this regard.

This guide provides tax planning strategies for corporate executives, businesses, individuals, nonprofit entities and trusts. We hope that this guide will help you leverage the tax benefits available to you presently, or reinforce the tax savings strategies you may already have in place, or develop a tax-efficient plan for 2021 and 2022 as tax changes either materialize or evaporate.

To help you prepare for an uncertain year-end, below is a quick reference guide of action steps, organized by several common legislative and individual scenarios, that can help you reach your tax-minimization goals as long as you act before the clock strikes midnight on New Year’s Eve. Not all of the action steps will apply in your particular situation, but you could likely benefit from many of them. Taxpayers may want to consult with us to develop and tailor a customized plan, with defined multiyear tax modeling to focus on the specific actions that you are considering as tax changes, perhaps favorable or unfavorable, undoubtedly loom over at least the next year. We will be pleased to help you analyze the options and decide on the strategies that are most effective for you, your family and your business.

Whether you should accelerate taxable income or defer deductions between 2021 and 2022 largely depends on your projected highest (aka marginal) tax rate for each year (with tax rates for 2021 clearly known and those for 2022 less certain). While the highest official marginal tax rate for 2021 is currently 37 percent, you might pay more tax than in 2020 even if you were in a higher tax bracket due to credit fluctuations, long term capital gains, qualified dividends or a myriad of other reasons.

The chart below summarizes the most common 2021 tax rates together with the corresponding taxable income levels presently in place. Effective management of your tax bracket can provide meaningful tax savings, as a change of just $1 in taxable income can shift you into the next higher or lower bracket. These differences can be further exacerbated by other income thresholds throughout the code, discussed later in this guide, such as those for determining eligibility for the child tax credit and qualified business income deductions, among others. Income deferral and acceleration, while being mindful of bracket thresholds, can be accomplished through numerous income strategies discussed in this guide, such as retirement distribution planning, bonus acceleration or deferral, and harvesting of capital gains and losses.

2021 Federal Income Tax Rate Schedule

Tax Rate


Head of Household

Married Couple


$0 - $9,950

$0 - $14,200

$0 - $19,900


$9,951 - $40,525

$14,201 - $54,200

$19,901 - $81,050


$40,526 - $86,375

$54,201 - $86,350

$81,051 - $172,750


$86,376 - $164,925

$86,351 - $164,900

$172,751 - $329,850


$164,926 - $209,425

$164,901 - $209,400

$329,851 - $418,850


$209,426 - $523,600

$209,401 - $523,600

$418,851 - $628,300


Over $523,600

Over $523,600

Over $628,300

While reviewing this guide, please keep the following in mind:

  • Never let the tax tail wag the financial dog, as we often preach. Always assess economic viability. This guide is intended to help you achieve your personal and business financial objectives in a “tax efficient” manner. It is important to note that proposed transactions should make economic sense in addition to saving on taxes. Therefore, you should review your entire financial position prior to implementing changes. Various nontax factors can influence your year‑end planning, including a change in employment, your spouse reentering or exiting the work force, the adoption or birth of a child, a death in the family or a change in your marital status. It is best to look at your tax situation for at least two years at a time with the objective of reducing your tax liability for both years combined, not just for 2021, especially at this time in our lives. In particular, multiple years should be considered when implementing “bunching” or “timing” strategies, as discussed throughout this guide.
  • As we mentioned earlier, even if you do not expect your income to increase in 2022, there is always the possibility of tax rate increases, particularly for high income taxpayers, with trillions of dollars of new legislation on the horizon and the economic pressures on the budget related to inflation. Of course, that economic pressure can cut both ways―it is also politically difficult to raise taxes during an inflationary period. Since there are always uncertainties in the stock market, economy and tax environments, we recommend the prudent approach of planning now and revising those plans as the need arises. As we noted earlier, another planning window to execute tax strategies may possibly exist between the time the Build Back Better Act passes and year-end.
  • As has been and will be our theme throughout this guide, the threat of tax increases looms ever present as we approach year-end. However, in-fighting within the Democratic Party and partisan gamesmanship threaten the likelihood that sweeping changes will be made by the end of 2021 and potentially 2022, though several smaller, incremental changes are possible. As a result, many important year-end planning considerations exist for taxpayers unconcerned with potential income, capital gain and dividend rate increases as well as potential changes to deductions including the high-profile state and local tax deduction.
  • Your year-end planning challenge this year is to consider the best course of action in advance of potential tax changes that will not be absolutely known until close to year-end, or even next year. So, if you are holding appreciated assets and planning to dispose of them early next year, you could consider accelerating the sale into 2021 to protect against the risk of a tax increase if the downside of such accelerated timing is not too costly. However, be very cautious about accelerated timing causing you to lose too much value, including the time value of money. That is, any decision to save taxes by accelerating income must consider the possibility that this means paying taxes on the accelerated income earlier, which would require you to forego the use of money used to satisfy tax liabilities that could have been otherwise invested. Accordingly, the time value of money can make a bad decision worse or, hopefully, a good decision better―a delicate balance, indeed.
  • While there is less emphasis in this guide on the traditional strategies of deferring taxable income and accelerating deductible expenses and more focus on if/then scenarios, with exceptions, you can often achieve overall tax efficiency by reversing this technique. For example, waiting to pay deductible expenses such as mortgage interest until 2022 would defer the tax deduction to 2022. Or, waiting to pay state and local taxes (SALT) until 2022 if you have already paid SALT of $10,000 in 2021 could also be worthwhile not only because of potential rate increases, but also if the $10,000 SALT cap is modified. You should consider deferring deductions and accelerating income if you expect to be in a higher tax bracket next year, you have charitable contribution carryovers to absorb, your marital status will change next year, or your head‑of‑household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation.
  • Both individuals and business have many ways to “time” income and deductions, whether by acceleration or deferral. Businesses, for example, can make different types of elections that affect the timing of significant deductions. Faster or slower depreciation, including electing in or out of bonus depreciation for instance, is one of the most significant. This type of strategy should be considered carefully as it will not simply defer a deduction into the following year, but can push the deduction out much further or spread it over a number of years.
  • Keep in mind: If you have analyzed your financial and tax situation, assessed the legislative outlook and determined that it still makes sense to act before year-end, there are a number of “timing” strategies available. Some changes may offer the flexibility of making a decision when filing the tax return for the year and do not need to be performed by year-end. At the end of the day, we recommend that you examine your tax situation now and consult with us.

With these words of caution in mind, following are observations and specific strategies that can be employed in the waning days of 2021 regarding income and deductions for the year, where the tried-and-true strategies of deferring taxable income and accelerating deductible expenses will result in maximum tax savings.

With tax provisions of the Build Back Better Act in flux, the best strategy for an uncertain year-end is to evaluate your individual scenario and develop plans in light of potential legislation but do not execute until passage is clearer.

As of this writing, negotiations continue and the Build Back Better Bill remains in limbo and awaits a vote by the Senate before any passage into law. This guide includes a discussion on key tax provisions. As a result, the best strategy for an uncertain year-end is to evaluate your individual scenario and develop plans in light of potential legislation but do not execute until passage is clearer.

As you will notice throughout this guide, we have highlighted the key tax provisions of the Build Back Better Act, which passed the House of Representatives in November and is currently pending in the Senate. Accordingly, we have included “Potential Legislation Alerts” throughout this guide to call attention to the provisions currently under consideration, or those that may have been considered earlier in the year, which merit your attention and brief consideration. In short, you can also refer to a quick summary below, which lists the provisions still “in” the Build Back Better bill passed November 19, and those provisions currently “out” or excluded from the bill.





High-income surtax

5% of modified adjusted gross income (MAGI) over $10 million, additional 3% on MAGI over $20 million (single).


Individual tax rate change

Previous versions discussed increasing the top tax rate from 37% to 39.6% for those making over $400,000.


Capital gains rate change

Earlier in the year, proposals including eliminating the capital gains rate entirely, subjecting capital gains to the ordinary tax rate (up to 39.6%, depending on the proposal) or raising the capital gains rate from 20% to 25%.


Enhanced family credits

Extended and enhanced child tax credit, dependent care credit and earned income credit.


Eliminate backdoor Roth conversions

Revived at the last minute in the House, the bill would prohibit individuals from converting an after-tax contribution to a Roth account, beginning in 2022.


High balance retirement plan limitations

Taxpayers with retirement savings in excess of $10 million would be prohibited from additional contributions to tax advantaged accounts. For individuals with more than $20 million, the amount of required minimum distributions would be increased.


SALT cap expansion

Up to $80,000 of state and local taxes can be deducted, up from $10,000 under current law. This provision is expected to face significant resistance and modification in the Senate.


Corporate income tax

Previous proposals included a corporate tax rate increase from the current 21% to as high as 28%.


Corporate minimum tax and stock buyback tax

For corporations with income over $1 billion, a 15% minimum tax on financial statement income would apply. For publicly traded companies, a 1% excise tax would be assessed on the value of any stock bought back in a given year.


Estate tax increases

Previous proposals discussed increasing the estate tax rate and lowering the estate tax exemption. In the current bill, the estate tax is unaffected.


Changes to grantor trust rules

Prior versions of the Build Back Better Act would have pulled grantor trust assets into the grantor’s taxable estate and treated transfers between grantors and grantor trusts as sales between third parties, including recognition of gain. These provisions were cut from the most recent versions of the bill.


Elimination of valuation discount

Previous versions of the bill would have eliminated the ability to utilize valuation discounts on the transfer of nonbusiness assets. This change could have greatly impaired or eliminated the ability to utilize limited partnerships or limited liability companies as an efficient way of transferring assets to trusts or other family members.


Elimination of step-up in basis at death

During President Biden’s campaign, and in his American Families Plan from April, he had proposed eliminating the ability of decedents to pass capital gains on to heirs free of income tax at death. This proposal has not been in included in any of the bills considered in Congress.

This year, more than any other, you need to have a plan in place and be ready to act should Congress pass significant legislation in the waning days. To that end, below is a quick and easy reference guide of action steps that can help you reach your tax-minimization goals, as long as you act before the clock strikes midnight on New Year’s Eve. In this guide, we have identified the best possible action items for you to consider, depending on the scenario you encounter as the year draws to a close.

Not all of the action steps will apply in your particular situation, and some may be better for you than others. In addition, several steps can be taken before year-end that are not necessarily “quick and easy” but could yield even greater benefits, especially in a period where tax rates appear to be on the rise. For example, perhaps this is the year that you finally set up your private foundation to achieve your charitable goals (see item 108) or maybe you decide it is time review your estate plan in order to utilize the current unified credit (see items 111-125). Consultation to develop and tailor a customized plan focused on the specific actions that should be taken is paramount, especially as tax changes are expected, to a certain degree.

To help guide your thinking and planning in light of the multiple situations in which you may find yourself at year-end, we have compiled Quick-Strike Action Steps that follow different themes depending on several common situations. Due to the changing legislative environment, you may wish to consider several situations below and identify the most relevant and significant steps for your particular situation.

Quick-Strike Action Step Themes





You expect higher ordinary tax rates in 2022

• Increased income

• Tax increases are passed on those with incomes over $400,000

• Getting married, subject to marriage penalty

• Accelerate income into 2021

• Defer deductions until 2022

• Accelerate pass-through income into 2021 to avoid expanded NIIT (item 1)

• Accelerate income to avoid high-income surtax (item 5)

• Accelerate installment sale gain into 2021 (item 100)

• Defer SALT payments to 2022 (item 23)

• Bunch itemized deductions (item 25)

You expect lower ordinary tax rates in 2022

• Retirement

• Income goes down


• Accelerate deductions into 2021

• Defer income until 2022

• Accelerate charitable pledges (item 10)

• Maximize medical deduction in 2021 (item 22)

• Prepay January mortgage (item 24)

• Consider deduction limits for charitable contributions (item 26)

• Sell passive activities (item 43)

• Increase basis in partnership and S corporation to maximize losses (item 44)

• Maximize contributions to FSAs and HSAs (items 57 and 58)

You have high capital gains in 2021

• Business or property sold

• An investment ends

• Employee stock is sold

• Reduce or defer gains

• Invest in qualified opportunity zones (item 14)

• Invest in 1202 small business stock (item 32)

• Perform a like-kind exchange (item 40)

• Harvest losses (item 31)

You have low capital gains in 2021

• Carry forward losses

• Increase capital gains

• Maximize preferential gains rates (item 29)

1. Accelerate pass-through income into 2021 to avoid potential net investment income tax (NIIT) in 2022, should potential legislation pass. Under the present law, pass-through income generated from a trade or business in which a taxpayer materially participates (including gain from the sale of business assets) is exempt from the 3.8 percent NIIT. The pending budget reconciliation bill aims to curb this exemption by including any income from a pass-through entity that is not subject to self-employment tax as income subject to the NIIT for taxpayers over certain income thresholds: $500,000 for joint filers, $400,000 for head of household and single filers, and $250,000 for married filing separately. Partners materially participating in partnerships/LLCs are generally subject to self-employment tax on their ordinary income/guaranteed payments; however, shareholders in S corporations that take distributions of profits, other than through payroll, may want to consider accelerating income into 2021 and delaying deductions into 2022 in order to avoid the NIIT. Additionally, taxpayers should consider accelerating closing on any sales of pass-through entities in which they materially participate into 2021 in order to avoid the NIIT being applied to gains on the sale of business assets, including goodwill. It is important to keep in mind that the acceleration of this income would increase 2021 modified adjusted gross income, which could potentially expose additional 2021 investment income to the net investment income tax.

2. Track economic impact payments received in 2021. The American Rescue Plan Act, passed in March 2021, authorized $1,400 ($2,800 for married filing jointly) economic impact (stimulus) payments for qualifying taxpayers. The act also included $1,400 payments for each dependent claimed by the taxpayer in 2021. The IRS issued payments beginning in April 2021 and throughout the summer. For single taxpayers, the phaseout of this credit begins at an AGI of $75,000 and is completely phased out at $80,000. For married filing jointly taxpayers, the phaseout begins at an AGI of $150,000 and is completely phased out at $160,000. Although many of these payments were sent out by the IRS starting in spring 2021, there may be eligible individuals who did not receive them,  such as children that graduated college in 2021 and are no longer dependents.

Planning Tip—Review your bank statements to double check if economic impact payments were received, and if so, the amounts of the payments. Provide this information to your tax preparer so that they may properly report them on your 2021 tax return. If a payment was received based on 2020 or 2019 information and it turns out that you are not eligible based on 2021 income, the economic impact payment will not need to be repaid. However, if you did not receive a stimulus payment earlier in the year and were ultimately eligible for the 2021 payment, you can claim a credit on your 2021 tax return.

3. Take advantage of the enhanced child tax credit. The American Rescue Plan Act significantly enhanced the child tax credit for tax year 2021, including advancing portions of the credit in monthly payments. Many taxpayers started receiving these advance monthly payments in July 2021. The credit was increased to a maximum of $3,600 for children under the age of 6, and a maximum $3,000 for children ages 6 to 17. There are two phaseouts to be considered in determining the credit:

  • The first $2,000 of the credit begins to phase out at $400,000 for married filing jointly taxpayers, and at $200,000 for any other taxpayer status, as it did last year.
  • The second portion of the credit, either $1,000 or $1,600 depending on the age of the child, begins to phase out at $150,000 for married filing jointly taxpayers, at $112,500 for head of household filers and at $75,000 for single and married filing separately filers.

The credit is also now fully refundable, as opposed to a previously refundable portion of only $1,400. Finally, nonqualifying child dependents (such as dependents over age 16 or those that do not meet the relationship test of a qualifying child) also qualify taxpayers for a $500 nonrefundable child tax credit per dependent.

Phaseout Range of Child Tax Credit by Modified Adjusted Gross Income


Single/Married Filing Separately

Head of Household

Married Filing Jointly

Child tax credit – standard $2,000 per child

$200,000 - $240,000

$200,000 - $240,000

$400,000 - $440,000

Child tax credit – additional $1,600 for a child under age 6

$75,000 - $107,000

$112,500 - $144,500

$150,000 - $182,000

Child tax credit – additional $1,000 for a child under age 17

$75,000 - $95,000

$112,5000 - $132,5000

$150,000 - $170,000

Planning Tip—If payments for this credit were received in advance, taxpayers will need to reconcile the amounts received with the actual amount of the eligible credit on the 2021 tax return. Keep track of the amount of advance credits received and share that amount with your tax adviser. If the amount of your child tax credit exceeds the total amount of advance payments, you can claim the remaining amount of the credit on your 2021 tax return. If the total amount of advance payments exceeds the amount of the credit on your return, you will need to repay the IRS the amount of any excess payments.

Consult with your tax adviser on options to maximize deductions that can lower your income to take maximum advantage of this credit.

4. Maximize child and dependent care credits. The American Rescue Plan Act made the child and dependent care credits refundable for 2021 only. The qualifying expenses for the credits were also increased to a maximum 50 percent of up to $8,000 of eligible expenses for one child, or $16,000 of eligible expenses for multiple children. Thus, the total maximum credit is now $4,000 for one child and $8,000 for multiple children, as opposed to $1,050 and $2,100, respectively, under 2020 (and 2022) law.

Phaseouts for the credit also changed for 2021. The percentage of eligible expenses will not decrease until taxpayers reach $125,000 of AGI, while households with over $400,000 in AGI will see the percentage decrease to zero percent at $438,000. Thus, while middle-income taxpayers will receive credit for a larger amount of their expenses, higher income taxpayers who could previously claim the credit may be phased out completely in 2021.

Planning Tip—As services are provided throughout the year, ask your child care providers for their taxpayer identification numbers and keep track of payments made. Consider whether individuals paid should be classified as household employees for whom you are required to issue a W-2. (See item 61.)

Percentage of Expenses Available for Credit (based on income)


50% to 20%


20% to 0%


Adjusted Gross Income

$0 to $125,000

$125,001 to $183,000

$183,001 to $400,000

$400.001 to $438.000

$438,001 and above

5. Accelerate income into 2021 to avoid potential higher rates in 2022, including 5 percent and 3 percent surtaxes on certain high-net-worth taxpayers. As a reversal to the traditional advice of accelerating deductions and deferring income, certain taxpayers may be better suited to accelerate income into 2021 and defer deductions to 2022. The current highest individual tax rate of 37 percent is applied to joint filers with taxable income in excess of $628,301 and single filers with taxable income in excess of $523,601. While the most recent versions of the Build Back Better Act do not include such a provision, we believe it possible that the final legislation will increase the top tax bracket to 39.6 percent and could decrease the taxable income thresholds to $509,300 for joint filers and $452,700 for single filers. Additionally, there is an even higher likelihood that a 5 percent surtax will be levied on taxpayers reporting modified adjusted gross income in excess of $10 million ($5 million for a married taxpayer filing separately, $200,000 for an estate and trust) and an additional 3 percent surtax will be imposed on modified adjusted gross incomes in excess of $25 million ($12.5 million for a married taxpayer filing separately, $500,000 for an estate and trust). These surtaxes would apply in tax years beginning after 2021, so taxpayers expecting to be above these thresholds in 2022 should consider accelerating income into 2021 as much as possible.

6. Be careful of excess business loss limitations. The Tax Cuts and Jobs Act of 2017 (TCJA) effectively limited the amount of business losses that taxpayers were able to use to offset other sources of income for tax years 2018-2025. Subsequent provisions of the CARES Act reversed the excess business loss (EBL) provisions under TCJA for 2018-2020, meaning that in 2021, taxpayers again have to monitor and potentially limit business losses under TCJA.

An EBL is defined as the excess of a taxpayer’s aggregate trade or business deductions over the taxpayer’s aggregate gross trade or business income or gain, plus a statutory threshold of $524,000 for joint filers ($262,000 for other filers). Net trade or business losses in excess of $524,000 for joint filers ($262,000 for other filers) are carried forward as part of the taxpayer’s net operating loss to subsequent tax years.

The CARES Act clarified several gray areas associated with EBL limitations created by TCJA, including:

  • The exclusion of taxpayer wages from trade or business income;
  • The exclusion of net operating loss carryforwards from determining a taxpayer’s EBL; and
  • Specifying that only trade or business capital gains are included in EBL computations, while excluding net capital losses. The taxpayer is to include in EBL limitations the lesser of either capital gain net income from business sources or capital gain net income.
Potential Legislation Alert—EBL limitations are currently set to expire for tax years beginning after December 31, 2025; however, pending tax legislation may make EBL limitations permanent and also undo the CARES Act provision that added EBLs to a taxpayer’s net operating loss carryforward. (Also see Utilizing Net Operating Losses at item 12.)

7. Maximize extended and expiring employer credits. With the passage of the American Rescue Plan Act in March, Congress extended the employee retention credit (ERC) created under the CARES Act in 2020. However, with the passage of the recent infrastructure legislation, the credit is largely unavailable for wages paid after September 30, 2021. The credit was designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits throughout the coronavirus economic emergency. As the economic recovery progressed, the credit was no longer serving its original purpose, and Congress thought the designated funds could be diverted to infrastructure spending. However, refund opportunities remain for the first three quarters of 2021 and all of 2020, should the business qualify and file amended payroll tax returns. For 2021, the American Rescue Plan Act expanded the credit by providing businesses with up to $21,000 of refundable credits for each employee, based on 70 percent of the wages paid. In order to qualify, the business must have paid wages while its operations were either completely or partially suspended by government order or during a quarter in which receipts were down 20 percent or more over the same quarter in 2019. A business may also qualify as a recovery startup business that began operations after February 15, 2020.

The Consolidated Appropriations Act has extended the family and medical leave credit created by the TCJA through 2025. In order to qualify for this credit, employers’ written policies must provide at least two weeks of paid leave for eligible full time employees and paid leave must be at least 50 percent of wages paid during a normal work week. The credit ranges from 12.5 percent to 25 percent of wages paid to qualified employees who are out for up to a maximum of 12 weeks during the year.

Finally, the work opportunity tax credit is a nonrefundable credit for employers who employ certain individuals from targeted groups, such as veterans, low income individuals and ex-felons. The size of the credit depends on the hired person’s target group, the number of individuals hired and the wages paid to each. This credit is also scheduled to expire at the end of 2025.

8. Utilize Restaurant Revitalization Fund before year-end to minimize reporting requirements. Earlier this year, many food and beverage providers took advantage of the Restaurant Revitalization Fund, which acted as a sort of lifeline for restaurants recovering from the pandemic. While funds do not have to be used until March 11, 2023, reporting on the use of funds is required annually. If a business does not use all funds on eligible expenses by December 31, 2021, additional annual reporting submissions to the Small Business Administration will be required until the award is fully expended or the performance period ends on March 11, 2023. For those restaurants that are close to using all of the funds, they may wish to accelerate certain expenses and/or double check eligible expenses to date to ensure the funds are spent before year-end to eliminate 2022 and 2023 reporting requirements.

9. Report 2020 COVID-19 retirement distributions on 2021 tax returns. In 2020, individuals who were either infected with COVID-19, had a family member with COVID-19 or experienced adverse financial consequences related to COVID-19 were eligible to take up to $100,000 worth of distributions from their retirement plans and include the distributions as income ratably over a three-year period. Since 2021 is the second year of this period, remember that your 2021 taxable income may include a pro rata portion of one of these distributions.

Planning Tip—If you did take an early distribution from a retirement plan during 2020, you still have the option of repaying it and receiving a refund of the tax paid on any amount previously picked up as income. Let’s say you took a $90,000 distribution from your retirement account in 2020 and reported $30,000 of income in 2020; then in 2021, you decide to pay back the distribution in full. You will be eligible to file an amended tax return and receive a refund for the tax that was paid on the $30,000 of income that was reported last year. You will also not be required to report $30,000 of income in 2021 or 2022 should the distribution be paid back in full.

10. Consider accelerating 2022 charitable pledges into 2021 whether by cash, credit card or donor-advised funds. Good news here for charitable giving: For 2021, the AGI limitation for cash contributions to public charities remains at 100 percent thanks to the CARES Act and the Consolidated Appropriations Act. This means that more current-year contributions are available as a deduction in 2021. Cash contributions made to a donor-advised fund are still subject to the 60 percent of AGI limitation, but these contributions will allow you to receive a tax deduction in the year contributed while enabling you to retain control of the timing of disbursements to specific charities in a later period, at your direction. In addition, prior year carryovers remain subject to the 60 percent of AGI limitation.

Remember that regardless of form, charitable contributions of money must be supported by a canceled check, bank record or receipt from the donee organization showing the name of the organization, the date of the contribution and the amount of the contribution.

Planning Tip—Even if you do not itemize for 2021, eligible individuals can still deduct up to $300 ($600 if married filing jointly) of qualified charitable contributions as a nonitemized deduction, as introduced in 2020 by the CARES Act. However, please note that, unlike in 2020, the 2021 version of this deduction is not “above the line” and factored in when reaching AGI. Rather, it is deducted in computing taxable income, which could adversely affect some deductions and credits.
Planning Tip—The increased limitation being extended through 2021 makes this year a great time to give. However, if you expect to claim the standard deduction in 2021, consider “bunching” your charitable contributions in excess of $300 ($600 if married filing jointly) into 2022 for maximum impact. Before making a large contribution, please consult with us to determine the impact on your unique situation.

11. Be sure to receive the maximum benefit for business interest. Under the TCJA, the interest expense deduction is limited to 30 percent of the adjusted taxable income of the business, applicable at the entity level for partnerships and S corporations. Certain smaller businesses (less than an inflation-indexed $26 million in average annual gross receipts for the three-year tax period ending with the prior tax period) were exempt from this limitation. In addition, real property trades or businesses can elect out of the limitation if they use the alternative depreciation system (ADS) to depreciate applicable real property used in a trade or business.

The deduction limit for net business interest expenses for 2021 is limited to 30 percent of an affected business’ adjusted taxable income, down from the more generous 50 percent limit that applied in 2019 and 2020 as an assist to businesses struggling with COVID-related challenges.

Potential Legislation Alert—For tax years following 2021, pending legislation would limit the interest deductibility of U.S. corporations with three-year average net interest expense exceeding $12 million that are members of an “international financial reporting group.” The interest deduction would be limited to their proportionate share of the group’s net interest expense, determined by a formula that compares the domestic corporation’s EBITDA (earnings before interest, taxes, depreciation and amortization) to that of the group. This new deduction limit would apply in conjunction with the regular one; whichever limit is more restrictive would apply. Interest disallowed because of this limitation could be carried forward for only five years.

12. Utilize net operating losses (NOL) appropriately. Similar to EBL limitations discussed above, the CARES Act provisions surrounding NOLs contained a special provision allowing taxpayers reporting an NOL in 2018, 2019 or 2020 to have the option of either carrying the NOL back five years or forward indefinitely.

For tax years 2021 and beyond, the option to carry an NOL back to a prior tax year has been eliminated (except for farming losses and certain insurance companies). NOLs can still be carried forward indefinitely and are also subject to an additional annual limitation of the lesser of 80 percent of current year taxable income, or the NOL carryforward. For example, a taxpayer with 2021 taxable income of $3 million and an NOL carryforward from a prior year of $4 million would be able to apply $2.4 million of the NOL carryforward (80 percent of 2021 taxable income) to offset its 2021 taxable income and carry forward the remaining NOL balance of $1.6 million indefinitely.

A taxpayer that may have difficulty taking advantage of the full amount of an NOL carryforward this year should consider shifting income into and deductions away from this year. By doing so, the taxpayer can avoid the intervening year modifications that would apply if the NOL is not fully absorbed in 2021. This may also avoid potentially higher tax rates in future years on the accelerated income and increase the tax value of deferred deductions.

For estimated tax purposes, a corporation (other than a large corporation) anticipating a small NOL for 2021 and substantial profit in 2022 may find it worthwhile to accelerate just enough of its 2022 income (or defer enough of 2021 deductions) to create a small profit in 2021. Doing so would allow the corporation to base its 2022 estimated tax payments on the small amount of 2021 taxable income, rather than pay 2022 estimates on 100 percent of its 2022 taxable income.

If you are in the position to carry an NOL back (farming and certain insurance companies), but expect to report taxable income in future years, it may be worthwhile to forgo the carry back period in order to apply the NOL to future years where tax rates are expected to be higher. Also, it is important to keep in mind that carrying back a loss could have adverse effects on other items of a tax return. Please analyze the scenarios and discuss with a trusted tax adviser before making any decisions.

13. Be mindful of PPP forgiveness implications. Congress created the Paycheck Protection Program, better known as “PPP,” back in March 2020 as the COVID-19 pandemic continued to ravage the economy, forcing thousands of businesses to shutter abruptly. The PPP authorized the funding of forgivable loans of up to $10 million per borrower, which qualifying businesses could spend to cover payroll, mortgage interest, rent and utilities expenses. At the end of 2020, Congress approved a second round of PPP funding through the Consolidated Appropriations Act, which also settled the debate as to whether or not taxpayers could deduct, for tax purposes, expenses paid with PPP loan proceeds. In an extremely favorable decision, Congress both excluded the PPP forgiveness from taxable income and also allowed taxpayers to deduct expenses paid for with PPP funding, even if the PPP loan was ultimately forgiven.

Now that the tax treatment of PPP forgiveness has been clarified, it is important to consider the related tax implications of PPP forgiveness.

Generally, PPP forgiveness is treated as nontaxable income in the year forgiveness is approved/granted by the lender. However, if there is a “reasonable expectation” that the PPP loan will be forgiven and the borrower has taken all steps to ensure the loan forgiveness requirements have been met, there could be an argument made to treat the loan as forgiven before any official documentation is received from the lender. The timing of forgiveness is important to consider since PPP forgiveness increases tax basis, which may allow a taxpayer to deduct 2021 losses otherwise suspended due to insufficient tax basis. On the other hand, it may be beneficial for higher earning taxpayers to hold off on applying for forgiveness, thus recognizing forgiveness in 2022, where any losses suspended by basis would be more valuable as deductions due to anticipated higher tax rates. Depending on the size of the losses involved, it is important to consult your tax adviser for proper planning related to other provisions including, but not limited to, excess business loss and net operating loss limitations.

State conformity with respect to the treatment of PPP forgiveness income and deductibility of expenses varies. Consult with your tax adviser with respect to tax impacts of PPP loans at the state and/or local income tax level.

14. Invest in qualified opportunity zones to save on capital gains. Gains can be deferred on the sale of appreciated stock that is reinvested within 180 days into a qualified opportunity fund (QOF). This gain is deferred until the investment is sold or December 31, 2026, whichever is earlier. An individual is able to defer a capital gain as long as the property was sold to an unrelated party. In addition to the deferral of gain, once the taxpayer has held the QOF investment for five years, they are able to increase their basis in the asset by 10 percent of the original gain. Due to this five-year holding period requirement, the QOF investment must be acquired by December 31, 2021.

All states have communities that now qualify. Besides investing in a fund, one can also take advantage of this opportunity by establishing a business in the qualified opportunity zone or by investing in qualified opportunity zone property.

15. Claim a refund of the corporate alternative minimum tax (AMT) credit. For 2018, the corporate AMT was repealed by the TCJA. However, corporations that paid AMT in 2017 and earlier were allowed to carry forward AMT paid as a credit against regular tax. The CARES Act of 2020 allowed corporate taxpayers to claim 100 percent of any remaining credit, regardless of tax liability, beginning in 2018 by filing an amended return for an immediate cash infusion. If your business still has AMT credits remaining, please contact us so we can prepare the necessary filings to get your business’ cash now.

16. Enjoy increased charitable contribution limits for C corporations. Normally, corporations are limited to charitable contributions of 10 percent of taxable income. However, with the passage of the CARES Act, this limit was increased to 25 percent of taxable income for the 2020, and was subsequently extended into the 2021 tax year. While the deduction for contribution of food inventory is usually limited to 15 percent of net income, this too was raised to 25 percent for 2020 and 2021. This limit will allow more grocery and package stores to donate to local food banks and shelters to combat food insecurity plaguing parts of the country.

17. Complete a solar installation prior to year-end for maximum benefit. Under the current law, the solar investment tax credit allows for a credit of 26 percent of eligible expenses for projects installed between 2020 and 2022. Beginning with projects commenced in 2023, this credit will drop to 22 percent of eligible expenses, though legislation is currently being considered that will reinstate the credit at 30 percent through 2031.

18. Claim a deduction for casualty and disaster losses. In February 2021, President Biden continued the “emergency” previously declared under the Stafford Act in March 2020, extending the approval of all major disaster requests for all 50 states, the District of Columbia and other various U.S. territories related to COVID-19.

In addition, in 2021, Hurricane Ida led to federally declared emergencies in Louisiana, Mississippi, Delaware, New Jersey, Pennsylvania and New York. Other states also suffered damages leading to the declaration of federal emergencies. If you have any questions about whether an event qualifies, please do not hesitate to ask for clarification.

For tax purposes, any losses attributed to a federally declared emergency in 2021 can be pushed back into 2020, such as the closure of stores, losses on mark-to-market securities and permanent retirement of fixed assets. However, lost revenues and the decline in fair market value of property as a direct result of economic hardships would not constitute a loss under Internal Revenue Code Sec 165(i).

While we are beyond the point where taxpayers could include the loss on their 2020 tax return (the due date was October 15, 2021), it is still possible for taxpayers to go back and amend 2020 filings, especially if 2020 profits could be offset with 2021 disaster losses. The subject of disaster losses remains a very complicated matter, and there are many rules and stipulations that would prevent taxpayers from taking advantage of the election. There are also certain reasons why taxpayers would not want to make the election. For those reasons, we recommend that you consult with us before delving into the amendment process.

19. Remit any payroll tax deferrals by December 31. Under the CARES Act, many employers and self-employed individuals were able to defer deposit and payment of the employer portion of Social Security taxes and self-employment taxes for 2020. Portions of these taxes related to income earned between March 27, 2020, and December 31, 2020, could be deferred, with 50 percent due by December 31, 2021, and the remaining balance due by December 31, 2022.

If deferral was a part of the tax planning strategy utilized in 2020, it is important that you deposit at least 50 percent of the deferred amount by December 31, 2021. Any amount less than 50 percent deposited will result in failure to deposit penalties on the entire amount back to the original deposit due date (over a year and half).

Virtually any cash-basis taxpayer can benefit from strategies that accelerate deductions or defer income, since it is generally better to pay taxes later rather than sooner (especially when income tax rates are not scheduled to increase). For example, a check you send in 2021 generally qualifies as a payment in 2021, even if the check is not cashed or charged against your account until 2022. Similarly, deductible expenses paid by credit card are not deductible when you pay the credit card bill (for instance, in 2022), but when the charge is made (for instance, in 2021).

With respect to income deferral, cash-basis businesses, for example, can delay year-end billings so that they fall in the following year or accelerate business expenditures to the current year. On the investment side, income from short-term (i.e., maturity of one year or less) obligations like Treasury bills and short-term certificates of deposit is not recognized until maturity, so purchases of such investments in 2021 will push taxability of such income into 2022. For a wage earner (excluding an employee-shareholder of an S corporation with a 50 percent or greater ownership interest) who is fortunate enough to be expecting a bonus, he or she may be able to arrange with their employer to defer the bonus (and tax liability for it) until 2022. However, if any of this income becomes available to the wage earner, whether or not cash is actually received, the bonus will be taxable in 2021. This is known as the constructive receipt doctrine.

20. Review the increased standard deduction. For 2021, the standard deduction has increased slightly to $25,100 for a joint return and $12,550 for a single return. Taxpayers age 65 or older and those with certain disabilities may claim increased standard deductions.

Standard deduction (based on filing status)



Married filing jointly



Head of household



Single (including married filing separately)




Planning Tip—With the standard deduction continuing to increase, many taxpayers who previously itemized may find their total itemized deductions close to or below the standard deduction amount. In such cases, taxpayers should consider employing a “bunching” strategy to postpone or accelerate payments, which would increase itemized deductions. This bunching technique may allow taxpayers to claim the itemized deduction in alternating years, thus maximizing deductions and minimizing taxes over a two-year period. For a more in-depth discussion of bunching, see item 25.

21. Consider obtaining an IP PIN. The Identity Protection (IP) PIN is a six-digit number assigned by the IRS (and known only by the IRS and taxpayer) to help safeguard their tax information. Previously, these PINs were only available to confirmed victims of identity theft. In 2021, the program expanded to voluntary applicants, allowing taxpayers to take a proactive step in protecting their tax information. When a taxpayer opts into this program, it prevents their tax return from being filed without an accompanying IP PIN. An IP PIN received from the IRS is valid for one year and must be renewed each year thereafter. For greater detail, we previously wrote on this topic in this Alert.

Observation—If your Social Security number has been exposed or compromised, we strongly advise obtaining an IP PIN. However, for all others, there are advantages and disadvantages of having an IP PIN. While the additional protection provided is compelling, there are drawbacks and inconveniences that could result from opting into the program. First, remembering to apply each year may be strenuous. In addition, it is possible that the additional layer of protection could delay the processing of your tax return. Lastly, as 2021 is the first year for the IP PIN, there may be glitches or issues associated with this new program and you may want to sign up later, after the IP PIN program has worked out any issues. For some, the inconvenience of retrieving this information online each year or maintaining the notice you receive in the mail may be a small price to pay for the increased security of your IRS tax account. For others, the inconveniences and potential hiccups may be too much to handle despite the increase in tax-related identity theft.
Planning Tip—The IRS notes that the “Get an IP PIN tool is unavailable until January 2022 for scheduled maintenance. Once available again, the tool will require an extensive identity verification process; however, upon completion of the verification, an IP PIN should be provided immediately.

Itemized Deduction Planning

22. Pay any medical bills in 2021. The Consolidated Appropriations Act of 2021 permanently reduced the medical expense deduction floor to 7.5 percent of AGI. In addition, the deduction is no longer an AMT preference item, meaning that even taxpayers subject to the AMT would benefit from deductible medical expenses.

Planning Tip—Pay all medical costs for you, your spouse and any qualified dependents in 2021 if, with payment, your medical expenses are projected to exceed 7.5 percent of your 2021 AGI, as this may lower your tax liability for 2021. You also may wish to accelerate qualified elective medical procedures into 2021 if appropriate and deductible.

23. Defer your state and local tax payments into 2022. The limitation of the state and local tax deduction was one of the most notable changes enacted by the TCJA in 2017. In 2021, the deduction limit for state and local income or sales and property taxes of $10,000 per return ($5,000 in the case of a married individual filing separately) remains unchanged, though pending legislation may change this.

Planning Tip—If you live in a state with either high income, sales or real estate taxes and you are not subject to AMT, this could significantly change your tax calculation. As the year draws to a close, if you have already exceeded the $10,000 in state and local tax payments deductible under current law, you may wish to consider postponing any additional payments into early 2022, where appropriate. For many taxpayers, prepaying state and local taxes will be of no benefit in 2021. Though generally we advise many taxpayers to accelerate deductions into the current year where possible, we believe an increase to the SALT cap is more likely in 2022 than in 2021.
Observation—While the IRS has crippled most workarounds to the SALT cap passed by the states, on November 9, 2020, the IRS issued Notice 2020-75, which outlines that “specified income tax payments” are deductible by partnerships and S corporations in computing their income or loss and are not taken into account when applying the SALT limitation to a partner in a partnership or shareholder in an S corporation.

The new regulations apply to a new type of pass-through entity (PTE) tax that several states have enacted since passage of the TCJA. By imposing an income tax directly on the PTE, a state’s tax on PTE income now becomes a deduction for the PTE for federal income tax purposes.

Currently, 19 states assess such a tax (up from seven this time last year): Alabama, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oklahoma, Oregon, Rhode Island, South Carolina, and Wisconsin. The legislatures of Michigan, North Carolina, Ohio and Pennsylvania have proposed PTE tax bills that are still pending. Please contact us to “crunch the numbers” on this tax in your state and evaluate the potential benefits of a workaround strategy.

Potential Legislation Alert—The current version of the Build Back Better Act pending in Congress does contain a provision that will increase the SALT cap from $10,000 to $80,000 for all taxpayers, though this provision is likely to change when the Senate considers the bill. Senator Bernie Sanders has introduced a proposal to allow an unlimited SALT deduction for some taxpayers, with a phasedown of the deduction to $10,000 at some yet-to-be-determined income level. Regardless, if the Build Back Better Act does pass, we expect a SALT cap modification to be included in the final bill.

24. Prepay your January mortgage payment if you will be under the mortgage interest limitation. For acquisition indebtedness incurred after December 15, 2017, the mortgage interest deduction is limited to interest incurred on up to $750,000 of debt ($375,000 in the case of a married individual filing a separate return). The mortgage interest from both a taxpayer’s primary and secondary residences remains deductible up to this balance limit on newer debt. Home equity indebtedness not used to substantially improve a qualified home is no longer deductible. However, if a portion of the funds taken from home equity indebtedness are used to improve the property, an equal percentage of the interest paid on that debt can be deducted. Debt existing prior to December 15, 2017, remains limited to the prior law amount of $1 million for original mortgage debt.

Planning Tip—It is important to consider how the proceeds of any home equity loans were used in determining whether or not the interest is deductible. While proceeds from home equity loans used to pay general household bills do not result in deductible interest, if you used the proceeds to improve your primary home, such home equity interest may be deductible. Thus, if you have a home equity loan that you originally used for other purposes and are considering home renovations, you may wish to pay off the loan and use it for the new renovations to create deductible interest. In addition, if you are planning to refinance and your total mortgage balance will exceed $750,000, please contact us to ensure you retain maximum deductibility and do not run afoul of certain rules related to refinancing mortgage indebtedness.

25. Consider paying state and local taxes, mortgage interest, medical expenses, charitable gifts, etc. (subject to limits noted within this guide) in the same year as opposed to spreading the payments over two years. By bunching deductions and deferring taxable income along with using AGI‑reducing techniques, you increase the value of all deductions and reduce your overall tax liability.

In considering the strategies noted below, however, keep in mind that if you pay a deductible expense in December 2021 instead of January 2022, you reduce your 2021 tax instead of your 2022 tax, but you also lose the use of your money for one month. Generally, this will be to your advantage, unless in one month you can generate a better return on use of the funds than the tax savings. In other words, you must decide whether the cash used to pay the expense early should be for something more urgent or more valuable than the increased tax benefit.

Planning Tip—If you have already paid state and local taxes of $10,000 in 2021, waiting to pay state and local taxes until 2022 could be worthwhile not only because of potential rate increases but also if the $10,000 SALT cap is modified or repealed.
Planning Tip—You may wish to consider refinancing your mortgage to take advantage of the current lower rates, which will likely increase shortly. Any points you paid on a previous refinancing that have not been fully amortized would be deductible in full in 2021 as long as the previous mortgage is paid off by the end of the year. In addition, even though the interest paid on a lower-rate mortgage would be less and would result in a smaller tax deduction, it also would improve your monthly cash flow. As noted above, use sound economic planning in your decision-making process rather than viewing every transaction in terms of its tax effect.

The following chart illustrates the tax treatment of selected types of interest.

Interest Expense Deduction Summary*

Type of debt

Not deductible

Itemized deduction

Business or above-the-line deduction

Consumer or personal




Taxable investment [1]




Qualified residence [2]




Tax-exempt investment




Trading and business activities




Passive activities [3]




* Deductibility may be subject to other rules and restrictions.

[1] Generally limited to net investment income.

[2] For 2021, including debt of up to $750,000 ($1 million for debt incurred prior to December 16, 2017) associated with primary and one secondary residence. Home equity loan interest deduction is suspended, unless the loan proceeds are used to buy, build or substantially improve the taxpayer’s home securing the loan.

[3] Subject to passive activity rules.

Charitable Contributions 

As discussed in item 10 above, consider paying 2022 pledges in 2021 to maximize the “bunching” effect.

Investment Interest

This is interest on loans used to purchase or carry property held for investment purposes (e.g., interest on margin accounts, interest on debt used to purchase taxable bonds, stock, etc.). Investment interest is fully deductible to the extent of net investment income, unless incurred to purchase securities that produce tax-exempt income. Net investment income is equal to investment income less deductible investment expenses. Sources of investment income include income from interest, nonqualified dividends, rents and royalties. If you bunch your investment expenses in one year so that little or no investment interest is deductible, the nondeductible investment interest can be carried forward to the following year.

By rearranging your borrowing, you may be able to convert nondeductible interest to deductible investment interest. In addition, you may be able to increase your otherwise nondeductible investment interest by disposing of property that will generate a short‑term capital gain. The extra investment interest deduction may even offset the entire tax on the gain. Disposing of property that will generate long‑term capital gain will not increase your investment income unless you elect to pay regular income tax rates on the gain. Accordingly, you should review your debt and investment positions before disposing of such property.

Planning Tip—An election can be made to treat qualified dividend income as nonqualified. This would increase the amount of net investment income and consequently the amount of deductible investment interest. Although the election would result in qualified dividend income being taxed at the taxpayer’s top marginal income tax rate rather than, in general, at a 20 percent rate, tax savings could result. The only way to determine if this makes sense is to crunch the numbers and see if the overall tax liability decreases. Since investment interest is deductible for AMT purposes, making this election could reduce the AMT.

Medical and Dental Expenses 

As discussed in item 22 above, a medical deduction is allowed only to the extent that your unreimbursed medical outlays exceed 7.5 percent of your AGI. To exceed this threshold, you may have to bunch expenses into a single year by accelerating or deferring payment as appropriate.

Planning Tip—Keep in mind that premiums paid on a qualified long-term care insurance policy are deductible as medical expenses. The maximum amount of the deduction is based on the taxpayer’s age. For example, the deduction for such premiums paid for an individual age 40 or younger is limited to $450, while the deduction for an individual age 71 or older is limited to $5,640. These limitations are per person, not per tax return, so a married couple where both husband and wife are 71 or older would be entitled to a maximum deduction of $11,280, subject to the 7.5 percent of AGI floor noted above.
Observation—A divorced parent generally can deduct medical payments incurred for his or her child even though the other parent claims the dependency exemption. Also, a child may be entitled to a deduction for the medical expenses paid on behalf of a parent, even though the child cannot claim the parent as a dependent because the parent has gross income of at least $4,300 in 2021.

Charitable Giving

26. Avoid deduction limits for noncash charitable contributions. Donating appreciated securities such as stocks, bonds and mutual funds directly to charity allows a taxpayer to avoid taxes on these capital gains, though the deduction for capital gain property is limited to 30 percent of AGI, with any excess carried forward for up to five years.

For personal property, the charitable deduction for airplanes, boats and vehicles may not exceed the gross proceeds from their resale. Form 1098-C must be attached to tax returns claiming these types of noncash charitable contribution. Furthermore, donations of used clothing and household items, including furniture, electronics, linens, appliances and similar items, must be in “good” or better condition to be deductible. You should maintain a list of such contributions together with photos to establish the item’s condition. To the extent they are not in “good condition,” you will need to secure a written appraisal to deduct individual items valued at more than $500.

Observation—Substantiation of charitable contributions has grown in importance in the eyes of the courts and the IRS. If you are thinking of making a large noncash charitable contribution that is not in the form of publicly traded stock, make sure you acquire and maintain the correct information and forms needed to substantiate your deduction. Charitable contributions in excess of $250 must have a written acknowledgment from the organization, while most contributions over $5,000 will require an appraisal. The chart below is a useful guide for determining what you need to have in order to deduct your noncash charitable contribution.

Noncash Contribution Substantiation Guide

Type of donation

Amount donated

Less than $250

$250 to $500

$501 to $5,000

Over $5,000

Publicly traded stock

• Receipt

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

Nonpublicly traded stock

• Receipt

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Qualified appraisal

• Form 8283 Section B


• Receipt

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Qualified appraisal

• Form 8283 Section B

Vehicles, boats and airplanes

• Receipt

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Qualified appraisal

• Form 8283 Section B

All other noncash donations

• Receipt

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Qualified appraisal

• Form 8283 Section B

Volunteer out-of-pocket expenses

• Receipt

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

• Acknowledgment

• Written records

Planning Tip—Another noncash contribution you may wish to consider is a conservation easement. A conservation easement allows for the permanent use of real property by a government or charity —such as preservation of open space, wildlife habitats or for outdoor recreation. The easements afford the donor a charitable contribution for the difference in the fair market value of the property prior to the grant of the easement less the value of the property after the easement. The deduction is taken in the year of the transfer even though the charity does not receive the property until a later time, if ever.

27. Make intelligent gifts to charities. Although there has been much volatility in the stock market this year, gifts of appreciated stock remain a great way to maximize charitable gifting while also avoiding capital gains taxes. Do not give away loser stocks (those that are worth less today than what you paid for them). Instead, sell the shares and take advantage of the resulting capital loss to shelter your capital gains or income from other sources, as explained above. Then give cash to the charity. Since you just sold the stock, you will have the cash on hand. As for winner stocks, give them away to charity instead of donating cash. Under either situation, you recognize multiple tax benefits. When gifting appreciated stock to charity, you not only avoid paying capital gains taxes, gift and estate taxes, but you may also be able to deduct the value of the stock for income tax and AMT purposes. As always, be aware that gifts to political campaigns or organizations are not deductible.

As in years past, charitable donations are subject to certain AGI limitations. The good news is that, for 2021, cash donations made to charitable organization remain deductible up to 100 percent of your AGI.

Deductions Allowable for Contributions of Various Property



Tangible personal property

Appreciated property

Public charity

100% of AGI

30% of AGI

30% of AGI

Private nonoperating foundation

30% of AGI

20% of AGI

20% of AGI

Private operating foundation

50% of AGI

50% of AGI

30% of AGI

Donor-advised fund

60% of AGI

30% of AGI

30% of AGI


Planning Tip—Another strategy to consider is a charitable remainder trust, where income-producing assets are transferred to an irrevocable trust. The donor or other noncharitable beneficiaries receive trust income for life or for a period of years. The donor receives an upfront charitable contribution equal to the present value of the remainder interest. The charity receives the remaining trust assets when the income interests end. For the estate tax implications of a charitable remainder trust, see item 115. Also, consider the use of donor-advised funds, where you can contribute cash, securities or other assets. You can take a deduction and invest the funds for tax-free growth while recommending grants to any qualified public charity.
Observation—It is important to confirm that the donation you are considering is contributed to an organization that is eligible to receive tax-deductible donations (known as a “qualified charity”). The IRS website has a qualified charity search tool help you determine eligibility.

28. Consider an investment in a special-purpose entity. As an additional “workaround” to the SALT limitations mentioned previously at item 23, certain states also employ special-purpose entities (SPEs), which allow taxpayers to make charitable contributions to certain nonprofits (usually schools) while claiming a state tax credit for the contribution. While the taxpayer generally does not receive a federal charitable contribution deduction for the amount of contribution for which they will receive a state credit, taxpayers often receive a much greater return in tax benefits dollar for dollar than contributions made outside of these SPE programs. In Pennsylvania, for example, the educational improvement and opportunity scholarship tax credits (EITC/OSTC) allow taxpayers to effectively divert state tax payments to donations to private schools, scholarship organizations, pre-K programs and other education initiatives.

To illustrate, using the Pennsylvania EITC/OSTC program, suppose a taxpayer contributes $50,000 to a special-purpose LLC, which in turn contributes the funds to the EITC/OSTC program. As a member of the LLC, at year end, the taxpayer would receive a K-1 from the entity reporting a Pennsylvania state tax credit for either 75 percent or 90 percent of the contribution, depending on whether they commit to making this contribution for one or two years, respectively. Assuming a two-year commitment, the taxpayer will receive a $45,000 credit on their Pennsylvania income tax return, reducing the tax owed by $45,000. In addition, the taxpayer would receive a federal income tax charitable contribution deduction for the remaining $5,000. Assuming a 35 percent federal tax bracket, this would result in a federal tax benefit (reduction in tax) of $1,750. Thus, on top of the $45,000 state tax benefit, the total tax benefit from a $50,000 contribution to an EITC/OSTC would be $46,750. By comparison, a contribution to a non-EITC/OSTC qualifying scholarship program would realize a tax benefit of only $17,500 (35 percent of $50,000). Note that if any of the $45,000 Pennsylvania state tax credit is unused in the taxable year, the excess will not be refunded or carried forward.


EITC/OSTC contribution

“Normal” charitable contribution

Amount of contribution (A)



Pennsylvania tax credit (B)



Contribution for which no state credit is given (C=A-B)



Federal tax rate (D)



Federal tax savings (E=C*D)



Total federal and state tax benefit (B+E)




Tax-Efficient Investment Strategies

For 2021, the long-term capital gains and qualifying dividend income tax rates, ranging from zero to 20 percent, have increased incrementally, as shown below.

Long-Term Capital Gains Rate


Married Filing Jointly

Head of Household

Married Filing Separately


Up to $40,400

Up to $80,800

Up to $54,100

Up to $40,400


$40,401 - $445,850

$80,801 -$501,600

$54,101 - $473,750

$40,401 - $250,800


Over $445,850

Over $501,600

Over $473,750

Over $250,800

In addition, a 3.8 percent tax on net investment income applies to taxpayers with modified adjusted gross income that exceeds $250,000 for joint returns ($200,000 for singles). Here are some ways to capitalize on the lower rates as well as other tax planning strategies for investors.

Planning Tip—The capital gains rates remain largely untouched in 2021 with only small changes to the income thresholds for zero percent, 15 percent and 20 percent rates. Additionally, the zero percent capital gains rate for taxpayers in the lowest two tax brackets (10 or 12 percent) is preserved. Therefore, taxpayers should consider: (1) deferring income into 2022 in order to reduce 2021 income, and thus qualify for the zero percent capital gain rate in 2021, and/or (2) delaying the sale of long-term capital assets until 2022 if you will be within the 15 percent ordinary income tax bracket in 2022, which again will qualify use of the zero percent capital gain rate in 2022.
Potential Legislation Alert—Earlier this year, proposed legislation included efforts to increase the top capital gains rate from 20 percent to 25 percent or even tax capital gains at ordinary income rates as high as 39.6 percent. While the current form of the legislation does not include any significant changes to the capital gains tax, this remains an area of interest among Democrats as a potential source of tax revenue. The best course of action as the year draws to a close is to identify the winners and losers in your portfolio, develop plans with your financial and tax adviser for multiple scenarios and be prepared to act.

29. Maximize preferential capital gains tax rates. In order to qualify for the lower 20 percent, 15 percent or zero percent capital gain rate, a capital asset must be held for at least one year. That is why it is important when disposing of your appreciated stocks, bonds, investment real estate and other capital assets to pay close attention to the holding period. If it is less than one year, consider deferring the sale so you can meet the longer-than-one-year period (unless you have short-term losses to offset the potential gain). While it is generally unwise to let tax implications be your only consideration in making investment decisions, you should not ignore them either. Keep in mind that realized capital gains may increase AGI, which in turn may reduce your AMT exemption and therefore increase your AMT exposure, although to a much lesser extent than in years past, given the increased AMT exemptions in recent years.

Planning Tip—To take maximum advantage of the spread between capital gain and individual income tax rates, consider receiving qualified employer stock options in lieu of salary to convert ordinary compensation income to capital gain income.

30. Reduce the recognized gain or increase the recognized loss. When selling stock or mutual fund shares, the general rule is that the shares acquired first are the ones deemed sold first. However, if you choose, you can specifically identify the shares you are selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it is long- or short-term. One downfall of the specific identification method is that you may not use a different method (e.g., average cost method or first in, first out method) to identify shares of that particular security in the future. Rather, you will have to specifically identify shares of that particular security throughout the life of the investment, unless you obtain permission from the IRS to revert to the first in, first out method.

Planning Tip—In order to use the specific identification method, you must ask the broker or fund manager to sell the shares you identify and maintain records that include both dated copies of letters ordering your fund or broker to sell specific shares and written confirmations that your orders were carried out.

31. Harvest your capital losses. It always makes sense to periodically review your investment portfolio to see if there are any “losers” you should sell. This year, with the ongoing volatility in the stock market, there are likely capital losses lurking somewhere in your portfolio. As year-end approaches, so does your last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital losses. However, one must be mindful not to run afoul of the wash-sale rule, discussed at item 34.

Planning Tip—For some, bracket management through harvesting of capital gains may be a good strategy. If you expect to be in a higher tax bracket in the future, perhaps sell assets in the current year, pay tax at a lower tax rate and get a step up in tax basis. The effect is that you shift recognition of capital gain from a higher future rate to a current lower rate. If you like the investment position, repurchase the same or similar assets to maintain the upside potential and you will not be affected by the wash-sale rules as noted in item 34 below.

32. Take advantage of Section 1202 small business stock gain exclusion. For taxpayers other than corporations, Section 1202 allows for the potential exclusion of up to 100 percent of the gain recognized on the sale of qualified small business stock (QSBS) that is held more than five years, depending upon when the QSBS was acquired. The gain eligible for exclusion cannot exceed the greater of $10 million, or 10 times the aggregate adjusted basis of QSBS stock disposed of during the year. As an alternative, if the stock is held for more than six months and sold for a gain, you can elect to roll over and defer the gain to the extent that new QSBS stock is acquired during a 60-day period beginning on the date of the sale.

Planning Tip—Be aware that if you are harvesting losses to offset gains, the Section 1202 taxable gain will be less than what may have been anticipated. Accordingly, keep the Section 1202 gain exclusion in mind so you do not sell too many losses, resulting in the inability to claim all the losses harvested in 2021. Any excess loss would be carried forward to 2022 and succeeding tax years.
Potential Legislation Alert—Under proposed legislation and for stock sales after September 13, 2021, the 75 percent and 100 percent exclusion rates on the sale of QSBS will not apply to taxpayers with adjusted gross income of $400,000 or more. For a trust or estate, this rule applies regardless of the amount of AGI. In these situations, the 50 percent exclusion will apply. The law would include a binding contract exception so that this reduction does not apply to any sale made pursuant to a written binding contract in effect on September 12, 2021, and that is not modified in any material respect thereafter.

33. Beware of the “kiddie tax.” Generally, any investment income of a child in excess of $2,200 is taxed at the tax rate of the child’s parents, under what is known as the “kiddie tax.” For kiddie tax purposes, a child is defined as someone that has not yet reached the age of 18 by the end of the year, or an 18 year old or a full-time student age 19-23 who does not support him or herself.

Planning Tip—A child's earned income (as opposed to unearned investment income) is taxed at the child's regular tax rates, regardless of amount. Therefore, to save taxes if you have your own business, consider hiring the child and paying a reasonable compensation.
Observation—The net investment income tax (NIIT) is assessed on a taxpayer-by-taxpayer basis and is not subject to the kiddie tax rules unless the child exceeds the single-filer threshold for triggering NIIT. Therefore, there may still be possible savings in transferring assets to children subject to the kiddie tax if the parent is paying NIIT on the investment income. Of course, any time you are transferring assets, be certain to keep the gift tax in mind.
Planning Tip—Various measures can be taken to avoid or minimize the kiddie tax. Among those measures, consider investing a child’s funds in one or more of the following.
  • Owners of Series EE and Series I bonds may defer reporting any interest (i.e., the bond’s increase in value) until the year of final maturity, redemption or other disposition. (If held in the parent’s name and used for qualified higher education expenses, and assuming certain AGI requirements are met, the income is not taxed at all.)
  • Municipal bonds produce tax-free income (although the interest on some specialized types of bonds may be subject to the AMT).
  • Growth stocks that pay little dividends and focus more on capital appreciation should be considered. The child could sell them after turning 23 and possibly benefit from being in a low tax bracket. Selling them before then could convert a potential zero percent income tax on the gain into a 20 percent income tax.
  • Funds can be invested in mutual funds that concentrate on growth stocks and municipal bonds that limit current income and taxes. They may also limit risk through investment diversification.
  • Unimproved real estate that will appreciate over time and does not produce current income will limit the impact of the kiddie tax.
  • Section 529 plans offer investors the opportunity to experience tax-free growth, so long as distributions are used to fund qualified education expenses, discussed later at item 51. In addition, contributions to a 529 plan may qualify the donor for a deduction on his or her state income tax return.

34. Keep the wash-sale rules in mind. Often overlooked, the wash-sale rule provides that no deduction is allowed for a loss if you acquire substantially identical securities within a 61‑day period beginning 30 days before the sale and ending 30 days after the sale. Instead, the disallowed loss is added to the cost basis of the new stock. However, there are ways to avoid this rule. For example, you could sell securities at a loss and use the proceeds to acquire similar, but not substantially identical, investments. If you wish to preserve an investment position and realize a tax loss, consider the following options:

  • Sell the loss securities and then purchase the same securities no sooner than 31 days later. The risk inherent in this strategy is that any appreciation in the stock that occurs during the waiting period will not benefit you.
  • Sell the loss securities and reinvest the proceeds in shares of a mutual fund that invests in securities similar to the one you sold, or reinvest the proceeds in the stock of another company in the same industry. This approach considers an industry as a whole, rather than a particular stock. After 30 days, you may wish to repurchase the original holding. This method may reduce the risk of missing out on any anticipated appreciation during the waiting period.
  • Buy more of the same security (double up), wait 31 days and then sell the original lot, thereby recognizing the loss. This strategy allows you to maintain your position but also increases your downside risk. Keep in mind that the wash-sale rule typically will not apply to sales of debt securities (such as bonds) since such securities usually are not considered substantially identical due to different issue dates, rates of interest paid and other terms.
Observation—The wash-sale rules apply to the investor, not each individual brokerage account. Selling shares in one account with one broker and then buying them back with another broker is not a workaround solution. If trades are made in different accounts, you are ultimately responsible for wash-sale tracking.
Planning Tip—As discussed later at item 41, since the IRS classifies cryptocurrencies as “property” rather than securities, wash-sale rules do not apply, meaning that a taxpayer can sell a cryptocurrency at a loss and buy it back immediately without having to forego deducting the loss under wash-sale rules. This loss can then be used to offset other capital gains incurred during the tax year.
Potential Legislation Alert—Proposed legislation pending in Congress does consider drastic broadening of the wash-sale rules. First, the legislation proposes expanding the wash-sale rules to sales and purchases of securities by related parties, including spouses and children. Also, the legislation would close the loophole currently afforded to cryptocurrency and apply the wash-sale rules to digital assets.

35. Lower your tax burden with qualified dividends. The favorable capital gain tax rates (20, 15 or zero percent) make dividend-paying stocks extremely attractive, since these preferential lower rates will likely remain intact for 2021. Earlier this year, several proposals attempted to increase this rate from 20 percent to 25 percent, or even the highest ordinary tax rate. Though these proposals were ultimately abandoned, they may be reconsidered in 2022 and future years. However, the best course of action is to act based on current law and consider the makeup of your investment portfolio. Keep in mind that to qualify for the lower tax rate for qualified dividends, the shareholder must own the dividend-paying stock for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date. For certain preferred stocks, this period is expanded to 90 days during a 181-day period.

Observation—While dividends paid by domestic corporations generally qualify for the lower rate, not all foreign corporation dividends qualify. Only dividends paid by so-called qualified foreign corporations, which include foreign corporations traded on an established U.S. securities market (including American Depositary Receipts or ADRs), corporations organized in U.S. possessions and other foreign corporations eligible for certain income tax treaty benefits are eligible for the lower rates. Finally, beware of certain investments marketed as preferred stocks that are really debt instruments (e.g., trust preferred securities). Dividends received on these securities are not qualified dividends, and therefore do not qualify for the preferential capital gain tax rates.
Planning Tip—To achieve even greater tax savings, consider holding bonds and other interest-yielding securities inside qualified plans and IRAs, while having stocks that produce capital gains and qualified dividend income in taxable accounts. In addition, when a taxpayer is fast approaching retirement years, it may be more beneficial to invest in equities outside of the retirement accounts so they may take advantage of the more favorable capital gains rates when they decide to cash-in their investments to satisfy retirement-related expenses.

36. Consider tax-exempt opportunities from municipal bonds, municipal bond mutual funds or municipal ETFs. If you are in a high tax bracket, it may make sense to invest in municipal bonds. Tax‑exempt interest is not included in adjusted gross income, so deduction items based on AGI are not adversely affected. As long as your investment portfolio is appropriately diversified, greater weight in municipal bonds may be advantageous. However, be mindful of the AMT impact on income from private activity bonds, which is still a preference item for AMT purposes. In general, a private activity bond is a municipal bond issued after August 7, 1986, whose proceeds are used for a private (i.e., nonpublic) purpose. Accordingly, review the prospectus of the municipal bond fund to determine if it invests in private activity bonds. Anyone subject to the AMT, including those with incentive stock options, should avoid these funds.

Planning Tip—Tax-exempt interest is not included when calculating the net investment income tax, which, if you are already over the NIIT threshold, should be considered when determining your investment allocations as municipal funds will generate an even larger bang for your buck.
Observation—Depending on what type of tax-exempt securities you invest in and where you live, you could generate interest that is double or triple tax-exempt if the bond is issued by the state or municipality in which you live. Double tax-exempt investment income is income that is not taxed at the federal or state level. If you live in a locality that also has a tax on investment income (like Philadelphia’s school income tax), you may also achieve triple tax-exempt income, which is when your tax-exempt interest is not taxed at the federal, state or local level.
Potential Legislation Alert—The Infrastructure Investment and Jobs Act, signed into law November 15, slightly expanded the categories of bonds eligible for tax-exempt status to include certain energy-related projects, including carbon dioxide capture facilities. The Build Back Better Act has several provisions continuing this theme of expanding investment in clean energy and green projects. If passed, it is likely that more types of energy efficient bonds will be granted tax-exempt status.

37. Time your mutual fund investments. Before you invest in a mutual fund prior to February 2022, you should contact the fund manager to determine if dividend payouts attributable to 2021 are expected. If such payouts take place, you may be taxed in 2021 on part of your investment. You need to avoid such payouts, especially if they include large capital gain distributions. In addition, certain dividends from mutual funds are not “qualified” dividend income and therefore are subject to tax at the taxpayer’s marginal income tax rate, rather than at the preferential 20 percent, 15 percent or zero percent rate.

Illustration—Since mutual funds are valued based on the net asset value of the fund, if you receive a distribution of $25,000, the value of your original shares declines by $25,000―the amount of the dividend payment. Furthermore, if you are in the automatic dividend reinvestment plan, so that the $25,000 dividend purchases new shares, the value of your fund would now be about the same as your original investment. However, the $25,000 dividend payout is subject to the preferential tax rates. If it is not a “qualified” dividend, it is subject to tax of up to 37 percent. If you had invested after the dividend date, you would own about the same amount of shares but would have paid no tax!

38. Determine worthless stock in your portfolio. Stock that becomes worthless is deductible (generally as a capital loss) in the year it becomes worthless. The loss is calculated based on your basis in the stock, and you may need a professional appraiser’s report or other evidence to prove the stock has no value. In place of an appraisal, consider selling the stock to an unrelated person for at least $1, or writing a letter to the officers of the company stating that you are abandoning the stock. You have now eliminated the need for an appraiser’s report and are almost guaranteed a loss deduction.

Observation—You may not discover that a stock you own has become worthless until after you have filed your tax return. In that case, you are required to file an amended tax return for that year in order to claim a credit or refund due to the loss. For worthless stock, you can amend your return for up to seven years from the date your original return for that year had to be filed or two years from the date you paid the tax, whichever is later. This seven-year lookback is an exception to the normal time frame for amended returns, as the IRS is aware of the difficulty in determining when a security became truly worthless.

39. Consider the greatest tax exclusion hidden in your home. Federal law (and many, but not all, states) provides that an individual may exclude, every two years, up to $250,000 ($500,000 for married couples filing jointly) of gain realized from the sale of a principal residence. To support an accurate tax basis, maintain records, including information on original cost, improvements and additions. The exclusion ordinarily does not apply to a vacation home. However, with careful planning, you may be able to apply the exclusion to both of your homes.

Illustration—You can convert your former vacation home to your principal residence after selling your principal residence and claiming the allowable exclusion for your former vacation home. Of course, you would also have to use your former vacation home as your principal residence for a minimum of two years. Establishing residency and use is critical to the success of this technique. Proper conversions result in an additional $250,000/$500,000 of tax‑free gain. However, you may still have taxable gain to the extent of depreciation claimed. The same strategy applies when two individuals are planning to get married and each owns his or her own principal residence. If they do not sell one of the residences before marrying, it may not qualify as a principal residence on a subsequent sale if the residency and use requirements are not met. The result could be a fully taxable sale. You may also qualify for partial gain exclusion in certain circumstances.
Observation—Gain on the sale of a principal residence cannot be excluded if the home was acquired in a like-kind exchange within five years from the date of sale. Therefore, an individual who owns a principal residence, which was originally acquired in a like-kind exchange, must wait five years before selling the property in order to exclude gain up to $250,000 ($500,000 for married couples filing jointly).
Planning Tip—For many individuals, their greatest asset is the appreciated equity in their home. As you advance toward retirement, it is important to consider your home as an investment. If you plan to downsize in later years (after the kids have left the nest), this exclusion can help you realize up to $250,000 ($500,000 for married couples) of the appreciated equity in your home tax-free. It is commonly regarded as the greatest tax exclusion for most Americans.

40. Consider like-kind exchanges. A like-kind exchange provides a tax-free alternative to selling real property held for investment or for productive use in a trade or business. The traditional sale of property may cause you to recognize and pay taxes on any gain on the sale. A like-kind exchange, on the other hand, allows you to avoid gain recognition through the exchange of qualifying like-kind properties. The gain on the exchange of like-kind property is effectively deferred until you sell or otherwise dispose of the property you receive in the exchange. Since 2018, like-kind exchanges are only available for real property sales.

Observation—Although a like-kind exchange is a powerful tax-planning tool, it includes certain risks. Simply put, it postpones the tax otherwise due on the property exchanged, but it does not eliminate it. The gain will eventually be recognized when the acquired property is sold. If your property is worth less than your tax basis in it, do not consider a like-kind exchange, as the loss would also be deferred under the like-kind exchange rules. Instead, sell it and take the loss now.
Planning Tip—Like-kind exchanges provide a valuable tax planning opportunity if:
  • You wish to avoid recognizing taxable gain on the sale of property that you will replace with like-kind property;
  • You wish to diversify your real estate portfolio without tax consequence by acquiring different types of properties with the exchange proceeds;
  • You wish to participate in a very useful estate planning technique (continued like-kind exchanges allow you to permanently avoid recognition of gain); or
  • You would generate an alternative minimum tax liability upon recognition of a large capital gain in a situation where the gain would not otherwise be taxed. (The like-kind exchange shelters other income from the alternative minimum tax.)

There have been proposals to eliminate the preferential rate for long-term capital gains and qualified dividends on income over $1 million, resulting in a potential capital gain tax rate increase from 20 percent to 39.6 percent. While these proposals have been shelved, they could be resurrected in 2022. Therefore, a like-kind exchange may not make sense if you expect to ultimately sell the replacement property while in the 39.6 percent tax rate.

Potential Legislation Alert—Previous versions of the Build Back Better Act included provisions that would limit the amount of gain to be deferred by like-kind exchanges to $500,000 for single taxpayers and $1 million for married taxpayers filing jointly. Thankfully, this further restriction on the ability to perform like-kind sales has been removed from the current version of the draft legislation, though it may be considered in the future. If you are considering like-kind exchanges as part of your tax planning, it is best to stay up-to-date on the tax law with an experienced and informed practitioner.

41. Understand the tax implication of any cryptocurrency transactions. While most cryptocurrency exchanges are not required to issue formal tax documentation to traders, the IRS is already requesting records from major exchanges and cracking down on this industry as a whole. Gains and losses from the sale of cryptocurrencies, just like the sale of stock, must be reported on your tax return. As taxpayers are generally not provided with tax documents detailing sale prices and cost basis, taxpayers must track these items themselves to accurately report their income. Proper recording of basis in cryptocurrency can significantly decrease the capital gains, which may be assessed in the future as stricter reporting requirements are on the horizon. Language in the Infrastructure Investment and Jobs Act expands the broker and general information reporting obligations to apply to cryptocurrency transactions and signifies that these reporting requirements will go into effect after December 31, 2023.

Observation—For the first time last year, taxpayers had to represent whether or not they had engaged in the trading of virtual currency on the face of Form 1040, as opposed to 2019 where the indication was listed on Schedule 1. This demonstrates the increased focus on cryptocurrency compliance by the IRS.
Planning Tip—Not only do you have to recognize a gain or loss when you exchange virtual currency for other types of currencies, you also have to recognize the gain or loss upon exchange of the virtual currency for other property and/or services. So if you buy something online with virtual currency, that is a reportable transaction; if you purchase a subscription with virtual currency, that is also a reportable transaction. Because virtual currency is defined as property and not currency, any exchange for any type of value is a reportable tax event. Any movement of any virtual currency is supposed to be tracked and reported. In short, please do not use virtual currency like regular currency. Speculate on it like a normal investment. Your tax accountant may thank you with a smaller bill for your tax return!

42. Determine your level of participation in activities to either avoid or qualify for passive activity loss treatment. In general, losses from a passive activity are subject to more limitations (and therefore are less beneficial) than active losses. Typically, when an individual spends more than 500 hours participating in an activity during the year, the activity will not be considered passive. There are also other exceptions that allow passive activities to be classified as active, including participation during five of the preceding 10 tax years or having spent 100 hours on the activity during the year, which equals or exceeds the involvement of any other participant.

As for real estate professionals, eligible taxpayers may deduct losses and credits from rental real estate activities in which they materially participate, since they will not be treated as passive and may be used to reduce nonpassive income. An eligible taxpayer for these purposes spends more than 750 hours of services during the tax year in real property trades or businesses. In addition, a taxpayer’s personal use, or rental to others, of a vacation home during the last few days of the year may have a substantial tax impact.

43. Do not overlook the advantages of selling passive activities to free up suspended losses. Taxpayers can use passive losses to offset nonpassive income in the year in which they dispose of or abandon their entire interest in the activity in a taxable transaction, whether the transaction results in a gain or a loss.

Planning Tip—Dual tax benefit. If you have sufficient capital gains, you can sell a passive activity for a capital loss, offset the capital loss against the capital gains and also deduct prior year suspended losses from that passive activity. Should the sale result in a gain, this may still be a sound strategy since the gain will be taxed at a rate lower than the ordinary tax rate permitted for the passive loss. Once again, crunch the numbers to determine the tax impact.

44. Increase your basis in partnerships or S corporations to take advantage of any losses generated by the pass‑through entities. In order to claim losses from a flow-through, you need to have basis in the entity. In order to increase your basis and potentially free up losses, you may wish to increase basis in the entity by either contributing cash to the entity, either in the form of equity or debt. Keep in mind that loans made by a third-party lender to an S corporation and guaranteed by an S corporation shareholder do not increase the shareholder’s basis. The loan must be made directly from the S corporation shareholder to the S corporation in order to increase his or her basis.

Planning Tip—Maintain records of the amount you have at risk in each of your businesses or for-profit activities. This will allow the use of losses and deductions incurred in the activity and avoid unexpected recapture. If your at-risk amount approaches zero, consider ways to increase your basis and weigh that against the economic exposure involved.

Planning for Retirement

45. Participate in and maximize payments to 401(k) plans, 403(b) plans, SEP (self‑employed) plans, IRAs, etc. These plans enable you to convert a portion of taxable salary or self‑employed earnings into tax deductible contributions to the plan. In addition to being deductible themselves, these items increase the value of other deductions since they reduce AGI. Deductible contributions to IRAs are generally limited to $6,000 in 2021, while substantially higher amounts can be contributed to 401(k) plans, 403(b) plans and simplified employee pensions (SEPs). For 2021, the deduction for IRA contributions starts being phased out if you are covered by a retirement plan at work and your AGI exceeds $66,000 for single filers and $105,000 for married joint filers. In 2021, $19,500 may be contributed to a 401(k) plan as part of the regular limit of $58,000 that may be contributed to a defined contribution (e.g., money purchase, profit‑sharing) plan. This limit includes both employer and employee contributions. These limits are reflected in the table below. Don’t forget that additional catch-up contributions are allowed for those taxpayers ages 50 and above, as noted in the chart below.

IRAs can be formed and contributed to as late as April 15, and contributions can be made to an existing IRA on the due date of your return, including extensions. In addition, SEPs can be established and contributed to as late as the due date of your return, including extensions, or as late as October 15, 2022, for tax year 2021.

Planning Tip—Often, teenagers have summer or part-time jobs to earn extra spending money, while learning responsibility and valuable life skills. Retirement is usually the last thing on these teens’ minds. Since these jobs generate compensation, these teenagers are eligible to make either Roth or traditional IRA contributions up to the lesser of $6,000 or 100 percent of their compensation in 2021. A particularly generous parent, grandparent or other family member may wish to contribute to the child’s IRA by gifting the child the contribution, keeping in mind the gift tax, if any. A gift of $6,000 to a Roth IRA now will be worth significantly more, tax-free, when the child retires in 50 years or so. A 401(k) plan can also be converted into a Roth IRA, but there are potential tax considerations. Please see item 46 for more information
Observation—Roth 401(k) accounts can be established to take after-tax contributions if the traditional 401(k) plan permits such treatment. Some or all of the traditional 401(k) contributions can be designated by the participant as Roth 401(k) contributions, subject to the maximum contributions that already apply to traditional 401(k) plans (including the catch-up contributions), as reflected in the table below. The Roth 401(k) contributions are not deductible, but distributions from the Roth 401(k) portion of the plan after the participant reaches age 59½ are tax-free.

Annual Retirement Plan Contribution Limits

Type of Plan




Traditional and Roth IRAs

Catch-up contributions (ages 50-plus) for traditional and Roth IRAs







Roth and traditional 401(k), 403(b) and 457 plans

Catch-up contributions (ages 50-plus) for 401(k), 403(b) and 457 plans



$ 6,500



$ 6,500



$ 6,500

SIMPLE plans

Catch-up contributions (ages 50-plus) for SIMPLE plans







SEPs and defined contribution plans*




* Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2021, the limit as adjusted for inflation is $290,000.

Planning Tip—As long as one spouse has $12,000 of earned income in 2021, each spouse can contribute $6,000 to their IRAs. The deductibility of the contributions depends on the AGI reflected on the tax return and on whether the working spouse is a participant in an employer-sponsored retirement plan. Keep in mind that an individual is not considered an active participant in an employer-sponsored plan merely because their spouse is an active participant for any part of the plan year―so it is possible that contributions to the working spouse’s IRA are nondeductible while contributions to the nonworking spouse’s IRA are deductible. In addition, catch‑up IRA contributions, described above, are also permitted.
Potential Legislation Alert—As it currently stands, the Build Back Better reconciliation bill contains two provisions that target high balance retirement accounts. The first is that certain taxpayers earning over $400,000 with aggregate retirement balances in excess of $10 million would be prohibited from making any additional contributions to certain tax-favored accounts, such as 401(k)s, 457 plans and IRAs. This provision would become effective in 2029. The second provision is discussed below in item 47.

46. Take advantage of changes to retirement contribution rules. With the passage of the SECURE Act in 2019, there is no longer an age limit for individuals who choose to contribute toward a traditional IRA. Before 2020, those who turned 70½ during the taxable year were ineligible to make any further contributions to their IRA. Keep in mind that in order to contribute to a traditional IRA, a taxpayer needs to have earned income from a job or self-employment, so this only affects those seniors that are continuing to work after age 70½. The contribution limit for IRAs remains the same at $6,000 ($7,000 for those age 50 and over), and the deductibility of contributions may be limited based on income or your eligibility for an employer plan.

47. Avoid potential penalties for not taking a required minimum distribution (RMD). RMDs have not been waived for 2021, so if you turned 72 in 2020, you must take RMDs during tax year 2021. If you turned 72 during 2021, you have until April 1, 2022, to take the required minimum distribution. The penalty for not taking an RMD is excessive: 50 percent of the required distribution that is not taken by year-end.

Observation—Certain individuals still employed at age 72 are not required to begin receiving minimum required distributions from qualified retirement plans (401(k), profit sharing, defined benefit plans, 403(b)s, etc.) until after they retire, representing another often overlooked method of deferring tax on retirement savings.

Last year, in response to COVID-19, the CARES Act waived required minimum distributions for 2020. There is no longer an RMD waiver for 2021. As a result, if you are 72 or older as of December 31, 2021, you must take an RMD by year-end to avoid the 50 percent penalty, unless this is your first RMD, in which case you have until April 1, 2022. For each subsequent year, your RMD must be taken by December 31. Keep in mind, if you delay your initial RMD until April 1, you will be responsible for two withdrawals that year (one by April 1 and one by December 31), which could result in a larger tax liability.

Furthermore, RMDs for 2021 are calculated as if the 2020 waiver had not occurred. This means that no makeup 2020 RMDs are required for 2021. It also means that, in using the single life expectancy table, nonspouse beneficiaries will calculate their 2021 life expectancy factor by subtracting two years from their 2019 factor.

Potential Legislation Alert—As discussed in item 45 above, the Build Back Better reconciliation bill contains two provisions targeting high balance retirement accounts, the second of which relates to the RMD calculation. For taxpayers subject to the above contribution limit with retirement balances over $10 million and modified adjusted gross income over $400,000, $425,000 or $450,000, as applicable, the bill also requires the taxpayers to take minimum distributions from the plans. Generally, the minimum distribution is 50 percent of the excess of the balance over $10 million. In addition, for those with balances over $20 million, taxpayers must withdraw the lesser of the excess over $20 million or their Roth balances in IRAs and defined contribution plans. Only after application of this new Roth rule is the additional 50 percent distribution calculated. This provision would become effective in 2029.

48. Maximize wealth planning through Roth conversions. Converting a traditional retirement account such as a 401(k) or individual retirement account (IRA) into a Roth 401(k) or Roth IRA will create taxable income upon conversion and allow tax-free distributions in retirement. There are many good reasons (and a few bad ones) for converting a 401(k) or traditional IRA to a Roth IRA. Good reasons include:

  • You have special and favorable tax attributes that need to be consumed such as charitable deduction carryforwards, investment tax credits and NOLs, among others;
  • Assets in the traditional IRA have depressed value;
  • You expect the converted amount to grow significantly, and tax-free growth is desired;
  • Your current marginal income tax rate is likely lower than at the time of distribution (retirement);
  • You have sufficient cash outside the 401(k) or traditional IRA to pay the income tax due as a result of the conversion;
  • The funds converted are not required for living expenses, or otherwise, for a long period; and
  • You expect your spouse to outlive you and will require the funds for living expenses.

If you decide to rollover or convert from a 401(k) or traditional IRA to a Roth 401(k) or Roth IRA and you also expect your AGI and tax bracket to remain more or less constant, you should consider staggering the total amount you plan to shift over a period of years. For example, a taxpayer who plans to convert a total of $185,000 from a regular IRA to a Roth IRA should consider converting $37,000 per year for five years. This strategy may prevent the conversion from pushing a taxpayer into a higher tax bracket, since the conversion is generally fully taxable on the amount converted.

Keep in mind that a conversion cannot be recharacterized afterward, so careful planning is needed.

Planning Tip—Before transferring assets to a Roth 401(k) or Roth IRA, carefully analyze which one would provide the greater benefit, and consider the impact of the rollover or conversion on your effective tax rate. This year, many taxpayers have unrealized losses in brokerage accounts that can be harvested to lower their taxable income and reduce the “hit” from a Roth conversion. We would be happy to assist you in determining the appropriate amount of losses to harvest and corresponding amounts to convert to a Roth.
Planning Tip—Many taxpayers are prevented from making a Roth IRA contribution due to their AGI. For 2021, Roth contributions are prohibited for couples filing jointly whose AGI exceeds $208,000 and for singles and head of household filers whose AGI exceeds $140,000. However, this limitation can be worked around by making a so-called backdoor Roth contribution. A taxpayer can make nondeductible contributions to a traditional IRA and can subsequently convert these contributions into a Roth IRA without being subject to the AGI limitation. Any income earned on the account between the time it was a nondeductible IRA and the time of conversion to a Roth would be required to be picked up as income, though many taxpayers contribute to the traditional IRA and convert to the Roth within a short period to avoid this issue.

One potential downside of a backdoor Roth conversion is that the conversion may increase modified adjusted gross income for purposes of the net investment income tax, subjecting investment income to a 3.8 percent tax. While the conversion will create taxable income, that income would not be subject to the NIIT; however it could effectively subject other investment income to that tax. Be sure to discuss a possible conversion with us to determine holistic impact.

In recent years, “mega-backdoor” Roth contributions have become a hot planning topic, where employees with certain 401(k) plans can contribute up to $58,000 to a Roth 401(k) per year ($64,500 if the taxpayer is 50 or older). Importantly, the plan must allow for after-tax contributions (of up to $38,500), which would combine with traditional pretax deferrals (Up to $19,500; or $26,000 if 50 or over). When the pretax deferrals are included in taxable income and converted into a Roth 401(k), you ultimately have a $58,000 (or $64,500) contribution to a Roth 401(k) account. 

Potential Legislation Alert—At the last minute before passage in the House of Representatives, a provision was added to the Build Back Better Act, which, if passed, would prohibit taxpayers from converting after-tax retirement accounts to Roth accounts, either as part of an IRA or 401(k). This provision would be effective January 1, 2022, so if you are considering converting funds to a Roth via a “backdoor” Roth contribution strategy, you may only have the waning days of 2021 to do this. Backdoor Roth contributions may soon be a “now or never” tax planning strategy.

49. Make charitable contributions directly from 2021 IRA distributions. Current law provides an exclusion from gross income for certain distributions of up to $100,000 per year from a traditional IRA when contributed directly to a qualified tax-exempt organization to which deductible contributions can be made. For married couples, each spouse can make a $100,000 distribution from their respective retirement account for a potential total of $200,000. This special treatment applies only to distributions made on or after the date the IRA owner reaches age 70½ and must be made directly from the IRA trustee to the charitable organization. Distributions that are excluded from income under this provision are not allowed as a deduction. Qualified charitable distributions (QCDs), as these are called, may be especially beneficial for those taxpayers who claim the standard deduction or whose taxable Social Security benefits are affected by AGI thresholds.

Observation—Excluding the IRA distributions from AGI also results in a lower AGI, which may make income or deductions affected by AGI (such as medical deductions) more valuable and may also eliminate or reduce the amount of Social Security benefits that are subject to tax. Additionally, by excluding income with a QCD, you may also expand your eligibility for certain deductions and credits that might be lost if you had to declare the amount as income.
Planning Tip—Qualifying charitable distributions can be used to satisfy RMD requirements, thus allowing taxpayers to exclude income they would otherwise be required to include. It is also important to note that while the SECURE Act changed the age for the initial RMD to 72, the minimum age to make a QCD remains 70½.

While the CARES Act suspended the RMD requirement for 2020, there is no longer an RMD waiver for 2021. QCDs may be particularly valuable for those attaining age 72 in 2021 and deferring their initial RMD until April 2022, when they will also be required to take a 2022 RMD during the calendar year. As a practical matter, however, such charitable distributions may not be made to a private foundation or donor-advised fund.

50. Plan to stretch. The SECURE Act partially eliminated the “stretch IRA” strategy, whereby IRA owners would utilize their retirement accounts as a means to transfer wealth to the next generation. For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy (in the IRA context, referred to as a “stretch IRA”). This strategy is particularly beneficial for taxpayers with Roth IRAs, as beneficiaries do not have to pay taxes on withdrawals from the Roth.

For deaths of plan participants or IRA owners beginning in 2020, distributions to most nonspousal beneficiaries are generally required to be distributed within 10 years following the plan participant’s or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Planning Tip—In order to avoid the 10-year rule, distributions must be made to either:
  • The surviving spouse of the plan participant or IRA owner;
  • A child of the plan participant or IRA owner who has not reached majority;
  • A chronically ill individual; and
  • Any other individual who is not more than 10 years younger than the plan participant or IRA owner.

Distributions to any beneficiaries who qualify under any of these exceptions may generally take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020). Whether one is in the process of naming beneficiaries for their IRA or receiving payments from an inherited IRA, a knowledgeable tax adviser can assist in ensuring the required distributions are taken, while minimizing the tax due in light of other, nontax concerns, such as the need for cash flow.

Planning for Higher Education Costs

Many tax-saving opportunities exist for education-related expenses. If you or members of your family are incurring these types of expenses now or will be in the near future, it is worth examining them. Here are some strategies to consider as year-end approaches.

51. Retain control and plan ahead for tax-free growth with 529 qualified tuition plans. Section 529 plans have both favorable tax and nontax aspects for educational planning. The most important nontax aspect is that the ownership and control of the plan lies with the donor (typically the parent or grandparent of the beneficiary student) and not with the beneficiary. Having donor control and ownership of the plan means the plan is not considered an asset of the student for financial aid purposes, generally resulting in higher financial aid.

For federal income tax purposes, plan contributions are on an after-tax basis, although many states allow a deduction. Contributions and earnings on contributions that are subsequently distributed for qualified higher education expenses (including tuition, room and board, and other expenses) at accredited schools anywhere in the United States are free of federal income tax and may be free of state income tax. Since 2018, 529 plan owners can use tax-free distributions for up to $10,000 of eligible expenses at elementary and secondary schools, in addition to colleges and universities. Since the SECURE Act was passed in December 2019, tax-free distributions can now be used to pay for eligible expenses related to an apprenticeship program, in addition to higher education expenses. The SECURE Act also allows up to $10,000 of distributions to pay principal or interest on a qualified education loan of the beneficiary or a sibling of the beneficiary.

To the extent that distributions are not for qualified higher education expenses, regular income tax plus a 10 percent penalty may apply to the earnings portion of the distribution. As contrasted with the other education strategies discussed below, contributions may be made regardless of the donor’s AGI.

An election can also be made to treat a contribution to a 529 plan as having been made over a five-year period; consequently, for 2021 a married couple can make a $150,000 ($160,000 beginning in 2022) contribution to a 529 plan without incurring any gift tax liability or utilizing any of their unified credit, since the annual gift exclusion for 2021 is $15,000 (increasing to $16,000 for 2022) per donor and the contribution can be split with the donor’s spouse. It is important to note that additional gifts made in the five-year period to the same recipients have a high chance of triggering a gift tax filing obligation.

Planning Tip—If your resident state allows a deduction, make a contribution to a 529 plan and immediately take a qualified distribution to pay for college tuition. In effect, this will provide you with a discount on college costs at your marginal state income tax rate.
Observation—Currently, more than 30 states and Washington, D.C., allow a deduction for Section 529 plan contributions. Please make sure you have the appropriate 529 plan, as many states are particular about what type of plan can lead to a state deduction. For example, New York only allows deductions for 529 plans set up under New York law. If you have changed residency since setting up a 529 plan, review your options before contributing.

Finally, in general, to the extent that contributions to a 529 plan are not distributed for the benefit of the beneficiary, the account may be transferred to a member of the beneficiary’s family, penalty-free. As long as the amounts transferred are used for qualified education expenses, they will still be free from federal income tax, as noted above. However, any change in beneficiary may be subject to the federal gift tax so proper planning considerations should still be reviewed.

Planning Tip—It is important to plan for 529 plan distributions in coordination with the education credits discussed next. An individual's qualifying higher educational expenses (for determining the taxable portion of 529 plan distributions) must be reduced by tax-free education benefits (such as scholarships and employer-provided education assistance) plus the amount of the qualifying expenses taken into account in computing an education credit (whether allowed to the taxpayer or another taxpayer). To avoid any income recognition, it is important to talk to your tax adviser before any 529 plan distribution to perform a comprehensive review.

52. Take advantage of education credit options. You may be eligible for either the American opportunity tax credit or the lifetime learning credit if you pay college or vocational school tuition and fees for yourself, your spouse or your children. These credits reduce taxes dollar-for-dollar, but begin to phase out when 2021 AGI exceeds certain levels. The chart below provides a summary of the phaseouts.

2021 Education Expense and Credit Summary

Tax benefit

Single filers (not including married filing separately)

Joint filers

Maximum credit/deduction/contribution

American opportunity tax credit

$80,000 - $90,000

$160,000 - $180,000

$2,500 (credit)

Lifetime learning credit

$80,000 - $90,000

$160,000 - $180,000

$2,000 (credit)

Student loan interest deduction

$70,000 - $85,000

$140,000 - $170,000

$2,500 (deduction)

Coverdell education savings account

$95,000 - $110,000

$190,000 - $220,000

$2,000 (contribution)

Planning Tip—The credits are allowed for tuition paid during the year for education received that year or during the first three months of the next year. Consequently, consider paying part of 2022 tuition at the end of 2021 if you have not maximized the credit or reached the above income thresholds.
Planning Tip—Parents can shift an education credit from their tax return to the student’s tax return by electing to forgo the child tax credit for the student by not claiming the child as a dependent. This strategy is a common move for high-income parents whose income prevents them from claiming the credit or from receiving any benefit from the child tax credit. To benefit from this strategy, however, the student must have sufficient income, and therefore tax liability, to take advantage of the credit. It might be necessary to shift income to the student as well, perhaps through gifts of appreciated property (that the student then sells at a gain) or employment in a family business, as discussed in item 90. However, be careful about the impact on a student’s financial aid―shifting income to a student can reduce financial aid amounts and eligibility.
Planning Tip—Advanced high school students and high school students taking college-level classes (including dual credit classes) may be eligible for an education credit. For the American opportunity tax credit, the student must be enrolled at least half-time in a post-secondary degree program. For the lifetime learning credit, the student must also be enrolled in one or more courses that are part of a degree program, but there is no course workload requirement. Therefore, it may be easier for the student to qualify for the lifetime learning credit. In any case, the course(s) must count toward a degree to qualify. Perhaps the best way to determine this is to simply ask the educational institution. Preferably, the institution’s answer should be in writing and saved with your tax materials.

53. Remit additional student loan payments. The CARES Act initially gave temporary payment relief to borrowers of certain qualifying federal student loans. This extension has now received multiple extensions and has a final extension ending January 31, 2022. If your federal loans qualified, the U.S. Department of Education has automatically placed your loans in “administrative forbearance” through January 31, 2022. During this time, you are not required to make any payments and your applicable interest rate was adjusted to zero percent. You should consider making a payment by December 31, 2021, which will go directly toward your principal and may help pay down your loan faster.

If your loan did not qualify for administrative forbearance or if you paid interest in 2021 on a qualifying federal student loan, an “above the line” deduction of up to $2,500 is allowed for interest due and paid in 2021. Note that the deduction is not allowed for taxpayers electing the filing status of married filing separate. Additionally, a taxpayer who can be claimed as a dependent on another's return cannot take the deduction. The deduction is phased out when AGI exceeds certain levels. See chart above.

Planning Tip—It is important to take into consideration any interest payments by your employer that were excluded from income as discussed in item 104 below. These payments cannot count as student loan interest deductions, as this would result in a double tax benefit.

54. Fund contributions to a Coverdell education savings account. Coverdell education savings accounts must be established in a tax-exempt trust or custodial account organized exclusively in the United States. At the time the trust or account is established, the designated beneficiary must be under 18 (or a special needs beneficiary) and all contributions must be made in cash and are not deductible. The maximum annual contribution is limited to $2,000 per year, and the contribution is phased out when AGI exceeds certain levels. Distributions from Coverdell education savings accounts are excludable from gross income to the extent that the distributions do not exceed the qualified education expenses incurred by the designated beneficiary, which include kindergarten through grade 12 and higher education expenses. If distributions exceed qualified expenses, a portion of the distributions is taxable income to the designated beneficiary. Furthermore, to the extent that distributions are not used for educational expenses, a 10 percent penalty applies.

Planning Tip—Since Coverdell education savings accounts provide the same tax benefit as a 529 plan, you may wish to consider converting the Coverdell to a 529 and take a state tax deduction, if available in your state.
Observation—Many taxpayers do not understand the differences between a Coverdell education savings accounts and a 529 plan. Differences range from who sponsors the plan, income restrictions for contributions and when funds must be used. If you are deciding between the two, please reach out to your tax adviser for guidance.

55. Consider education benefits from financial aid and loan discharges. The American Rescue Plan Act of 2021 enabled an expansion of the exclusion from gross income for the amount of any qualified student loans cancelled or discharged in 2021 through 2025. The exclusion applies to a partial or a full discharge of a student loan. Additionally, The CARES Act excluded from gross income qualified emergency financial aid grants of the recipient.

Observation—The Internal Revenue Code is rarely this kind when it comes to the taxation of debt forgiveness. If you or a loved one qualifies for debt forgiveness or can take steps to qualify for debt forgives between 2021 and 2025, this would be an opportune time to receive debt forgiveness tax free.

Strategies for Saving

56. Help a disabled loved one maintain a healthy, independent and quality lifestyle with an achieving a better life (ABLE) account. An ABLE account is a tax-advantaged savings vehicle that can be established for a designated beneficiary who is disabled or blind. Only one account is allowed per beneficiary, though any person may contribute. Contributions to an ABLE account are not deductible, but the earnings in the account grow on a tax-deferred basis and may be distributed tax-free if used for qualified disability expenses, including basic living expenses such as housing, transportation and education, as well as medical necessities. If distributions are used for nonqualified expenses, those are subject to income tax plus a 10 percent penalty tax.

Total annual contributions by all persons to the ABLE account cannot exceed the gift tax exclusion amount ($15,000 for 2021, $16,000 for 2022), though additional annual contributions may be possible if the beneficiary is employed or self-employed. States have also set limits for allowable ABLE account savings. If you are considering an ABLE account, contact us for further information.

Observation—We understand that people sometimes fear giving because they do not want a disabled individual to lose something they are currently entitled to receive. While ABLE accounts have no impact on an individual's Medicaid eligibility, balances in excess of $100,000 are counted toward the SSI program's $2,000 individual resource limit. Thus, an individual's SSI benefits are suspended, but not terminated, when their ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account used for housing expenses count toward the SSI income limit. It is important to keep these potential nontax ramifications in mind before making a contribution.

57. Achieve tax savings via health and dependent care flexible spending accounts (IRC Section 125 accounts). These plans enable employees to set aside funds on a pretax basis for (1) medical expenses that are not covered by insurance up to $2,750 per year ($2,850 in 2022), (2) dependent‑care costs up to $10,500 per year and (3) adoption assistance of up to $14,440 per year ($14,890 in 2022). Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes (at maximum rates as high as 13.3 percent), resulting in a tax savings of as much as 57.95 percent. Paying for these expenses with after‑tax dollars, even if they meet various AGI requirements, is more costly under the current tax rate structure. Since many restrictions apply, such as the “use it or lose it” rule, review this arrangement before making the election to participate.

As a result of the American Rescue Plan Act, for the 2021 tax year only, taxpayers can contribute up to $10,500 toward a dependent care FSA. Please note that the 2022 contributions limit will revert to the 2020 amount of $5,000.

Illustration—The tax savings resulting from participation in flexible spending accounts (FSA) are often significant. Assume a married couple, each with an FSA, contributes $5,000 for uncovered medical costs ($2,500 from each FSA) and $5,000 for qualified day care expenses. Assuming a 37 percent tax rate, the family creates a tax savings of about $4,465; $3,700 in income taxes and $765 in Social Security/Medicare taxes, not counting any potential reductions in state income taxes.
Planning Tip—Section 125 plans often adopt a two-and-a-half month grace period (to March 15, 2022) during which employees who participate in the plan can incur expenses that can be treated as 2021 qualified expenses. Accordingly, this can potentially reduce employee contributions that would otherwise be subject to forfeiture. Please note that the Consolidated Appropriations Act of 2021 allowed employers to offer additional flexibility, including:
  • Health FSAs and dependent care FSAs may allow any remaining balances at the end of the 2021 plan year to roll over into the 2022 plan year;
  • Health FSAs and dependent care FSAs may extend grace periods for plan years ending in 2020 and 2021 for up to 12 months;
  • Health FSAs may allow employees who terminate participation during the 2020 or 2021 plan year to use up their unspent balances through the end of the plan year;
  • Dependent care FSAs may increase the age limit for certain eligible employees’ qualifying children from 13 to 14 for purposes of determining whether expenses may be paid or reimbursed;
  • Health FSAs and dependent care FSAs may allow participants to make prospective election changes during 2021 without regard to any change of status requirements.

You should check with your employer’s benefits department to determine if your employer has adopted any of the above permitted options.

Planning Tip—Married couples who both have access to FSAs will also need to decide whose FSA to use. If one spouse’s salary is likely to be higher than the Federal Insurance Contributions Act (FICA) wage limit ($142,800 for 2021, $147,000 for 2022) and the other spouse’s salary will be less, the one with the smaller salary should fund as much of the couple’s FSA needs as possible. This is because FSA contributions by the spouse whose income is higher than the FICA wage limit will not reduce the 6.2 percent Social Security tax portion of the FICA tax, but FSA contributions by the other spouse will reduce it. This planning tip also applies to health savings accounts mentioned below.

For example, if John’s salary is $160,000 and Mary’s salary is $50,000, FSA contributions of $5,000 by John will not reduce his Social Security tax (since, even reflecting the FSA contributions, his Social Security wages exceed $142,800), while FSA contributions of $5,000 by Mary will save her approximately $300 in Social Security tax.

58. Plan for a healthy retirement with a health savings account (IRC Section 223 accounts). Health savings accounts (HSAs) are another pretax medical savings vehicle that are currently highly favored in the marketplace by Congress. HSAs offer a tax-saving way to set aside funds to meet future medical needs, including those medical needs in retirement. The four key HSA elements include: (1) HSA contributions are deductible, within limits; (2) employer contributions to your HSA are not treated or taxed as income to you; (3) HSA earnings are not taxed; and (4) HSA distributions to cover qualified medical expenses are not taxed.

To be eligible for an HSA, you must be covered by a “high deductible health plan.” You must also not be covered by a plan that (1) is not a high deductible health plan and (2) provides coverage for any benefit covered by your high deductible plan. For self-only coverage, the 2021 limit on deductible contributions is $3,600. For family coverage, the 2021 limit on deductible contributions is $7,200. A "catch-up" contribution will increase each of these limits by $1,000 if the HSA owner is 55 or older at the end of the year.

Planning Tip—Careful consideration must be given to HSAs when becoming eligible for and enrolling in Medicare. An individual ceases to be an "eligible individual" starting with the month she or he is entitled to benefits under Medicare. However, mere eligibility for Medicare doesn't disqualify an individual from contributing to an HSA. An otherwise eligible individual who isn't actually enrolled in Medicare Part A or Part B may contribute to an HSA until the month that individual becomes enrolled in Medicare.

Most taxpayers know that once they are enrolled in Medicare, they cannot contribute to an HSA; however, many taxpayers who work past age 65 and have an HSA still can be surprised by something known as “retroactive Medicare.” If an individual files a Medicare application more than six months after turning age 65, Medicare Part A coverage will be retroactive for six months. Individuals who delayed applying for Medicare, but were later covered by Medicare retroactively to the month they turned 65 (or retroactively for six months), cannot make contributions to the HSA for the period of retroactive coverage. The retroactive enrollment made the taxpayer ineligible to contribute to an HSA for that period. The result is almost always excess contributions that need to be removed as soon as possible, with your employer needing to be alerted to the retroactive coverage. If you have an HSA that you still contribute to and you are considering applying for Medicare, please consult with your tax adviser first.

Planning Tip—The HSA is not a “use it or lose it” account like an FSA, which means wiser choices can be made in long-term healthcare spending. Funds remaining in an HSA at year-end are not forfeited, but remain in the account tax-free until distributed for medical purposes. Like IRAs, an individual owns their HSA, even after a job change, making the HSA a very portable savings device.
Planning Tip—Just as with IRAs (see item 45), HSA contributions can be gifted by another member of the family. If you want to help your child, grandchild or other relative that has just started working and they are covered under a high deductible health plan with an HSA, you can make the annual contribution on their behalf to their HSA. This allows your child or grandchild to take the deduction on their tax return while also funding an HSA that will hopefully grow and help them with any medical situation during their lives. Please note that this contribution needs to be taken into account when determining your annual gifting limits.

59. Consider tax payments by credit or debit card. The IRS accepts tax payments by credit and debit cards. Consequently, taxpayers may wish to pay tax payments with a credit card to earn frequent flyer miles, cash‑back bonuses, reward points and other perks. The IRS now allows a taxpayer to select their preferred payment processor from either payUSAtax, Pay1040 or ACI Payments, Inc., whose credit card rates ranged from 1.96 percent to 1.99 percent for tax year 2021. However, the fees charged to you by the payment processor may exceed the benefits received. For example, a $2,500 balance due payment will incur a fee of approximately $50, which is considered a nondeductible personal expense.

60. Consider accelerating life insurance benefits. Liquidating or selling a life insurance policy may be an option for certain taxpayers in need of funds. An individual who is chronically or terminally ill may exclude payments received under a life insurance policy from income, subject to certain requirements. Similarly, payments received from selling a life insurance policy to a viatical settlement provider, who regularly engages in the business of purchasing or taking assignments of such policies, may also be excluded.

61. Manage your nanny tax. If you employ household workers, try to keep payments to each household worker under $2,300. If you pay $2,300 or more to a worker, you are required to withhold Social Security and Medicare taxes from them and remit those withholdings, along with matching employer payroll taxes, on your individual income tax return on Schedule H, household employment taxes. Additionally, you may be required to file quarterly wage reports with your state Department of Labor to comply with state unemployment insurance requirements.

62. Consider deferring loan modifications and debt cancellations until 2022. A debtor generally recognizes taxable income in the amount of any debt forgiven or canceled, absent certain exceptions. If the taxpayer is insolvent or in bankruptcy, this cancellation of debt is usually not included in the taxpayer’s income. However, even when cancellation of debt is excluded from income, other attributes, such as basis, must generally be reduced, so the exclusion is more of a deferral of the income rather than an absolute exclusion. Further, it can often be difficult and expensive to determine whether a taxpayer is insolvent, which involves appraisals of assets and liabilities to determine their fair market value on a certain date.

Observation—There is also a gross income exclusion for canceled mortgage debt on a principal residence, which does not require an insolvency calculation. This exclusion was set to expire after December 31, 2020, but was extended through the end of 2025 by the Congressional Appropriations Act of 2021. However, the new law reduces the amount of debt that can be excluded from income, from $1 million to $375,000 for single filers and from $2 million to $750,000 for married filers.

63. Beware of alternative minimum tax (AMT). AMT remains less threatening than it has been in the past. The AMT predominantly applies to high-income individuals, disallowing certain deductions, while also including certain exempt income in taxable income. In 2021, the exemption amount for single individuals will be $73,600 and $114,600 for joint filers. For tax year 2021, the AMT tax rate of 28 percent applies to excess alternative minimum taxable income of $199,900 for all taxpayers ($99,950 for married couples filing separately).

Planning Tip—Many of the adjustments or preferential items that have been part of the alternative minimum taxable income calculation were eliminated with the passing of the TCJA in 2017. Even though the AMT exemption was dramatically increased in 2018, it is still important to plan for the AMT. This change had a significant impact on taxpayers living in states with high income taxes as the deduction for state and local taxes was not allowed in the AMT computation. The combination of the increased AMT exemption, the $10,000 limitation on the state and local tax deduction and the elimination of miscellaneous itemized deductions resulted in fewer taxpayers being subject to AMT. However, it is important to note that if the state and local tax deduction limitation is increased, as Congress is currently considering, more taxpayers may be impacted, though still not as many as in prior years due to the greatly increased exemption.

It may be beneficial to accelerate income, including short-term capital gains, into a year you are subject to AMT, as it could reduce the maximum marginal rate to which you are subject. The opposite could hold true as well—it may be beneficial to defer income as you could be subject to a lower AMT in a following year. You also may want to consider exercising at least a portion of incentive stock options (ISO) since the favorable regular tax treatment for ISOs has not changed for 2021. However, careful tax planning may be needed for large ISO lots, as exercising them could still subject you to the AMT. If you would not be subject to the AMT in 2021, follow the guiding philosophy of postponing income until 2022 and accelerating deductions (especially charitable contributions) into 2021.

64. Take advantage of extended energy credits. Several tax credits for purchasing or installing energy efficient improvements for qualified residential properties were scheduled to expire after 2020 but have been extended. The applicable credits are shown below:




Maximum Credit

Energy-efficient home improvements and qualified residential energy property

Dec. 31, 2021

• Exterior windows and doors

• Insulation and/or systems that reduce heat gain or loss

• Heat pumps, central air conditioners and water heaters.

• Biomass stoves

• Natural gas, propane or oil furnaces or hot water boilers

• Qualified advanced main air-circulating fans


Residential energy efficient property

Dec. 31, 2023

• Solar water heating, solar electric power

• Small wind systems, geothermal heat pumps, fuel cells

26% for 2020-2022, 22% for 2023

Qualified fuel cell motor vehicle

Dec. 31, 2021

Purchases of new qualified fuel cell motor vehicles

$4,000 to $40,000

Two-wheeled plug-in electric vehicle credit

Dec. 31, 2021

Highway capable, two-wheeled plug-in electric vehicles

10% of cost, up to $2,500

Alternative fuel vehicle refueling equipment credit

Dec. 31, 2021

Tanks and pumps used to store and dispense alternative fuel

$30,000 (for business)

$1,000 (for nondepreciable property)


Potential Legislation Alert—The Build Back Better Act extends the nonbusiness energy property and the new energy efficient home credits to property placed in service before the end of 2031. It also extends existing credits and creates new credits including new credits for:

  • Individuals who participate in a qualified state-based wildfire resiliency program;
  • Refundable qualified plug-in electric drive motor vehicle credit;
  • Purchase of used battery and fuel-cell electric cars;
  • Qualified commercial electric vehicles; and
  • Qualified electric bicycles.

65. Retroactively pay withholding via a retirement rollover. Once a year, the IRS allows taxpayers to take money out of an IRA tax-free, as long as it is rolled over to another IRA within 60 days. Some savvy individuals even use this provision to take out a short-term, tax-free loan. The one-year waiting period begins on the date you receive the IRA distribution, not on the date you roll the distribution back into the same or another IRA. These IRA withdrawals are able to have (and in some cases require) federal and/or state taxes withheld. Since withholding can be treated as evenly distributed throughout the year, it is possible to make up for missed estimated payments from earlier in the year.

For example, if you determine in the fourth quarter of 2021 that you missed the previous three quarterly federal estimated payments totaling $60,000, you could take out an IRS distributions for $100,000 with 80 percent or $80,000 withheld. The $80,000 would be remitted to the IRS and, within 60 days of the $100,000 distribution, you would pay back the entire $100,000 amount. The $80,000 of federal withholding would be applied evenly throughout 2021, resulting in $20,000 payments for each of the previous three quarters and therefore void the calculated $60,000 underpayment.

Planning Tip—Careful attention must be given to dates of distribution and when the amounts are repaid. Please consult your tax adviser to determine if a prior quarter underpayment exists, determine how much should be withheld, and to set up a timeline for the distribution and repayment. It is also important to consider that your assets will be withdrawn from your account until you pay it back within 60 days. The longer you wait to pay back the IRA, the greater the risk of missing potential market gains.

66. Withdraw retirement funds penalty-free for new parents who need it. Generally, a distribution from a retirement plan must be included in taxable income. Unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59½ is also subject to a 10 percent early withdrawal penalty on the amount includible in income. The SECURE Act created an exception for new parents to the 10 percent penalty. Now plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Planning Tip—While it is great to see Congress acknowledge the high expenses of birth and adoption and waive the penalty for early distribution, this distribution will still be considered as taxable income. You have up to one year post birth or adoption to make the distribution, so depending on your overall tax planning it might be beneficial for one spouse to take their $5,000 distribution in the first calendar year and the other spouse to take the distribution in the next calendar year, but before the one-year period ends. Please consult your tax adviser for the full tax consequences of this penalty-free distribution.

67. Plan for the net investment income tax and Medicare surtax. High-income taxpayers face two special taxes—a 3.8 percent NIIT and a 0.9 percent additional Medicare tax on wage and self-employment income.

Net Investment Income Tax

The 3.8 percent NIIT tax applies, in addition to income tax, on your net investment income. The tax only affects taxpayers whose adjusted gross income exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for a married individuals filing separately. These threshold amounts are not indexed for inflation. Thus, over time, inflation will cause more taxpayers to become subject to the 3.8 percent tax. Net investment income that is subject to the 3.8 percent tax consists of:

  • Interest;
  • Dividends;
  • Annuities;
  • Royalties;
  • Rents; and
  • Net gains from property sales.

Income from an active trade or business is not included in net investment income, nor is wage income. However, passive business income is subject to the NIIT. So while rents from an active trade or business are not subject to the tax, rents from a passive activity are. Income from a business of trading financial instruments or commodities is also included in net investment income.

Planning Tip—NIIT only applies if you have income in excess of the applicable threshold and you have income categorized as net investment income. Consider and discuss the following strategies with your tax adviser to help minimize net investment income:
  • Investment choices: Since tax-exempt income is not net investment income, shifting some income investments to tax-exempt bonds could result in reduced exposure to the NIIT. Additionally, a switch to growth stocks over dividend paying stocks may also be beneficial since dividends, even qualified dividends, will be taxed by the NIIT, resulting in a top tax rate for qualified dividends of 23.8 percent.
  • Growing investments in qualified plans: Distributions from qualified retirement plans are exempt from the NIIT; therefore, upper-income taxpayers with control and planning over their situations (i.e., small business owners), might want to make greater use of qualified plans. For example, creating a traditional defined benefit pension plan will increase tax deductions now and generate future income that may be exempt from the NIIT.
  • Charitable donations: As discussed in item 110, you may wish to consider donating appreciated securities to charity rather than cash. This will avoid capital gains tax on the built-in gain of the security and avoid the 3.8 percent NIIT on that gain, while generating an income tax charitable deduction equal to the fair market value of the security. You could then use the cash you would have otherwise donated and repurchase the security to achieve a step-up in basis.
  • Passive activities: Income from passive activities is generally subject to the NIIT. Increasing levels of participation in an activity so that the business income becomes nonpassive can avoid the NIIT.
  • Rental Income: If you are have a real estate professional designation, you also avoid NIIT. If you qualify as a “real estate professional,” as defined under the passive activity rules, and you materially participate in your rental real estate activities, those activities are not considered passive. If the rental income is derived in the ordinary course of a trade or business, it will not be subject to the NIIT.

Medicare surtax

Some high-wage earners pay an extra 0.9 percent Medicare tax on a portion of their wage income, in addition to the 1.45 percent Medicare tax that all wage earners pay. The 0.9 percent tax applies to wages in excess of $250,000 for joint filers, $125,000 for a married individuals filing separately and $200,000 for all others.

An extra 0.9 percent Medicare tax also applies to self-employment income for the tax year in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others. This 0.9 percent tax is in addition to the regular 2.9 percent Medicare tax on all self-employment income. The $250,000, $125,000 and $200,000 thresholds are reduced by the taxpayer's wage income. While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the additional 0.9 percent tax does not.

Planning Tip—While employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income, there could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer. If you have changed employers or change from being an employee to being self-employed or the reverse (self-employed to employee), watch for the possible additional 0.9 percent Medicare surtax.

68. Consider delaying the exercise of incentive stock options (ISOs), aka statutory options. If you receive ISOs, you are entitled to special treatment for regular tax purposes. This includes: no taxation at the time the ISO is granted or exercised; deferral of tax on the benefit associated with the ISO until the stock is sold; and taxation of the entire profit on the sale of stock acquired through ISO exercise. The ISO is taxed at the lower long-term capital gain rates as long as you hold it for more than two years from date of grant and one year from date of exercise. Employment taxes do not apply on the exercise of an ISO. Be aware that the exercise of an ISO may produce AMT tax, as discussed below.

Planning Tip—This special treatment is not allowed for AMT purposes. Under the AMT rules, you must include income from the year the ISO becomes freely transferable or is not subject to a substantial risk of forfeiture and the bargain purchase price, which is the difference between the ISO’s value and the lower price you paid for it. For most taxpayers, this occurs in the year the ISO is exercised. Consequently, even though you are not taxed for regular tax purposes, you may still have to pay AMT on the bargain purchase price when you exercise the ISO, even though you did not sell the stock and even if the stock price declines significantly after you exercise. Under these circumstances, the tax benefits of your ISO will clearly be diminished, in which case, you may wish to consider a disqualifying disposition. With the passage of the TCJA, the impact of the AMT has been diminished, though careful analysis of the tax environment and AMT exposure through the exercise of ISOs is necessary for maximum tax savings.
Planning Tip—Retirees generally have 90 days after retirement to exercise the options that qualify as ISOs. If you have recently retired or are approaching retirement, evaluate whether the exercise of remaining ISOs will be beneficial.

Also, if 2021 is a down year in terms of income and/or you are worried about future tax increases and wish to lessen the risk for both ordinary income tax rates and capital gains tax rates, consider exercising stock options this year. You will recognize income on many types of options, including nonqualified stock options and incentive options, at the time exercised. Exercising the options before year-end would trigger the income for 2021. Keep in mind, however, that such exercise will also accelerate the deduction for the employer when they may be seeking to defer deductions in anticipation of a rate increase.

Statutory Stock Option (ISO)


Regular tax


Grant date

Not taxable

Not taxable

At exercise date

Not taxable

Increases AMT income by FMV of option less exercise price.

Date of sale (holding period met)

• Income subject to capital gains rates
• Basis equals exercise price.

Decreases AMT income by the positive AMT adjustment required at exercise date.

Date of sale (holding period not met)

Gain on sale: FMV of the options less the exercise price is treated as taxable W-2 wages; excess gain is capital gain.
Loss on sale: The loss is a capital loss.

• Negative AMT adjustment equal to the positive AMT adjustment required at exercise date.
• No adjustment required if stock is exercised and sold in the same year.


Statutory Stock Option (ESPP)


Regular tax


Grant date

Not taxable

Not taxable

At exercise date

Not taxable

Not taxable

Date of sale (holding period met)

Compensation income if FMV of stock is greater than exercise price

Same as regular tax

Date of sale (holding period not met)

• The FMV (at exercise date) of the option minus the exercise price is treated as taxable W-2 wages.
• Basis in the stock is increased by the amount included in compensation. Difference between increased basis and the selling price is a capital gain or loss.

Same as regular tax


Nonstatutory stock option


Regular tax


Grant date

Not taxable unless FMV is readily determined.

Same as regular tax

At exercise date

Substantially vested stock: FMV of option minus the exercise price is treated as taxable W-2 wages.
Restricted stock: Defer recognition until substantially vested

Same as regular tax

Date of sale (holding period met or not met)

• The holding period requirement is not applicable to nonstatutory stock options.
• Income is subject to short-term or long-term capital gain or loss treatment.
• Basis equals the amount treated as taxable wages plus exercise price.
• Typically exercise and sale occur on the same day.

Same as regular tax

69. Take advantage of deferred compensation contributions to maximize the benefits of deferring income. Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2021, the limit as adjusted for inflation is $290,000. This means that for an executive earning $300,000 a year, deductible contributions to, for instance, a 15 percent profit-sharing plan are limited to 15 percent of $290,000, or $43,500. Nevertheless, there is a way to avoid this limitation that you might want to consider.

Benefits that are not subject to qualified plan limitations can be provided through nonqualified deferred compensation (NQDC) agreements. These plans have no mandatory contribution limits and it is at the employer’s discretion who participates. These deferred compensation agreements are contracts between an employer and an employee for the payment of compensation in the future—at retirement, on the occurrence of a specific event (such as a corporate takeover) or after a specified number of years―in consideration of continued employment by the employee.

Unlike a qualified plan, an NQDC is funded at the discretion of the employer and are subject to the claims of creditors. There are no guarantees that the benefits will be available to the employee in the future. Essentially, the trust is under the employer’s control and, structured properly, will result in a deferral of income taxes for the employee on the amount of compensation deferred above the traditional limitations. Distributions will be taxed at ordinary income rates and may be subject to Social Security and Medicare withholding.

70. Consider filing an IRC Section 83(b) election with regard to year-end restricted stock grants to preserve potential capital gain treatment. If you make the election within 30 days of the grant, you will pay tax at ordinary income rates on the spread between the market price (the value of the stock) and the grant price (the amount you paid). The benefit, however, is that you defer taxation on the future appreciation in the value of the restricted stock until it is sold and the postelection increase in value is taxed at the lower capital gain rates, rather than the higher ordinary income rates. The risk with making the election, however, is that the stock price might decline by the vesting date and you will have then prepaid income tax on an unrealized gain. The rules governing restricted stock awards are technically complex and call for careful tax planning strategies.

71. Consider filing an IRC Section 83(i) election with regard to qualified equity grants. Qualified employees at private companies who are granted nonqualified stock options or restricted stock units may elect to defer the income from qualified stock transferred to the employee by the employer for up to five years. This election is an alternative to being taxed in the year in which the property vests under IRC Section 83(a) or in the year in which it is received under Section 83(b). The election to defer income inclusion for qualified stock must be made no later than 30 days after the first date that the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.

If a qualified employee elects to defer income inclusion, the employee must include the income at the earliest of the following dates:

  • The first date the qualified stock becomes transferable, including transferable back to the employer;
  • The date the employee first becomes an excluded employee;
  • The first date on which any stock of the employer becomes readily tradable on an established securities market;
  • The date five years after the earlier of the first date the employee’s right to the stock is transferable or is not subject to a substantial risk of forfeiture; or
  • The date on which the employee revokes his or her inclusion deferral election.

72. Opt for a lump-sum distribution of employer stock from a retirement plan. Employer stock in a lump-sum distribution from a qualified plan is taxed based on the plan’s basis in the stock rather than on its value, unless a taxpayer elects otherwise. Consequently, assuming value exceeds cost, the tax on the unrealized appreciation is deferred until a later date when the stock is sold. This could be many years after receipt. As an added benefit, when the stock is sold at a later date, the gain is subject to tax at the more favorable long-term capital gains rate. Any additional appreciation that accumulates after the date of the lump-sum distribution must be held for at least a year to be given long-term capital gains treatment. Cash or other nonemployer stock distributed as part of the lump-sum distribution will be taxed at ordinary income tax rates.

73. Implement strategies associated with international tax planning. For executives and high-earning consultants on assignment in foreign countries, consider strategies that will reduce your individual tax costs, such as maximizing the foreign earned income and housing exclusion provisions, deductions for foreign taxes paid and credits for foreign taxes paid. Foreign taxation can depend on foreign tax treaties and requires an individualized approach where double taxation of income is avoided. The preparation of tax equalization calculations may be beneficial in determining the breakdown of compensation to maximize tax benefits associated with international assignments. See the discussion later at items 126-131.

74. Get a fresh pair of eyes to review tax planning. Corporate executives should consider whether additional tax assistance or supplemental wealth planning may add value. This third-party guidance may decrease conflict-of-interest risks presented by the dual activities of the employer company’s auditors performing tax services for company personnel. TAG administers a flexible Executive Tax Assistance Program designed for corporate executives, providing comprehensive, confidential and highly personalized individual and business tax preparation, planning and consulting services at group-discounted rates. TAG uses a strategic approach to provide comprehensive solutions to your needs.

75. Decrease your tax liability on pass-through income. Business income from pass-through entities is currently taxed at the ordinary individual tax rates of the owners or shareholders. Taxpayers who receive qualified business income from a trade or business through a partnership, limited liability company, S corporation and/or sole proprietorship are allowed a 20 percent deduction, subject to taxable income phaseouts and complex calculations, in arriving at taxable income. The deduction is also afforded to taxpayers who receive qualified real estate investment trust dividends, qualified cooperative dividends and qualified publicly traded partnership income. For owners with taxable incomes over $329,800 (joint filers) or $164,900 (all other filers), the deduction is subject to reduction or elimination based on the owner’s pro rata share of W-2 wages paid by the business and/or the business’ basis in qualified property.

In addition, for taxpayers who own a specified service business and whose taxable income exceeds $429,800 for married individuals filing jointly and $214,900 for all other filers, the deduction is phased out and no longer available.

A “qualified trade or business” is defined as any trade or business other than a specified service trade or business and other than the trade or business of being an employee. “Specified services” are defined as a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services (investing and investment management, trading, dealing in securities, partnership interests or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees). Notably absent from this list, and specifically excluded from the definition of specified services, are engineering and architectural services, as well as real estate agents and bankers.

Planning Tip—There are certain planning strategies taxpayers can use in order to take advantage of these deductions. The service businesses listed above should consider methods to increase tax-deferred income or decrease taxable income at the entity level, so that owners close to the $164,900/$329,800 threshold can take full advantage of the pass-through deduction. Some methods of reducing taxable income to fall within these thresholds include:
  • Consider the current status of contractors/employees. If the taxpayer is within the phaseout range and subject to wage limitations, it may be beneficial to deem current contractors as employees subject to W-2 wages. This both increases the W-2 wage base and will provide entity-level deductions for additional payroll taxes and benefits to reduce pass-through income to the shareholder/partner.
  • Take full advantage of retirement vehicles, which serve to reduce taxable income at the shareholder/partner level.
  • Partners and shareholders should plan to maximize above-the-line (such as retirement plan contributions, health insurance, among others) and itemized deductions for purposes of reducing taxable income.
  • Combine qualified businesses and treat them as one aggregated business for the purpose of the Section 199A computation. The combination could result in a higher deduction than treating the businesses separately. Combining businesses can also help taxpayers meet the wage limitations that are part of the deduction computation.
  • Qualified business income, for purposes of computing the 20 percent qualified business income deduction, does not include guaranteed payments to partners in a partnership. Reducing guaranteed payments and allocating profits to ordinary income could increase the deduction for certain partners. In order to do so, a careful review of the partnership agreement is advised and may also require amending the partnership agreement to properly document the change.
  • Investments in real estate investment trusts (REITs) and/or publicly traded partnerships (PTPs) are eligible for a straight 20 percent qualified business income deduction. REITs and PTPs are not subject to the W-2 compensation or basis limitations, or limitations of specified trade or businesses.
  • Perform an analysis to determine if it would be advantageous for married taxpayers to file separately to avoid the threshold limitations.
Proposed Legislation Alert—Earlier this year, proposed legislation included placing an overall cap on the amount of the total qualified business income deduction a taxpayer can claim per year in the amounts of $500,000 for joint filers or surviving spouses, $250,000 for married filing separately, $400,000 for all other filers and $10,000 for an estate or trust.

Should this provision be revived and included in any final legislation, taxpayers who have historically benefitted from a qualified business income deduction in excess of newly proposed caps may benefit from accelerating income into 2021 and deferring deductions to 2022 in order to maximize the qualified business income deduction in 2021 before proposed limitations go into effect.

Observation—The limitations and analysis in computing the qualified business income deduction are complex. We would be pleased to consult with you for assistance in properly navigating these rules to ensure preservation of applicable deductions.

76. Take advantage of lower corporate income tax rates. Since 2018, corporations have been subject to a flat 21 percent tax rate. The 21 percent rate also applies to personal service corporations such as accounting firms and law firms.

Proposed Legislation Alert—Previous versions of the Build Back Better Act aimed to create graduated corporate rates for 2022 and beyond as follows:
  • $0 - $400,000: 18 percent
  • $401,000 - $5 million: 21 percent
  • Above $5 million: 26.5 percent

For corporations with taxable income greater than $10 million, an amount of tax would have been determined by the graduated brackets above, increased by the lesser of (i) 3 percent of the excess taxable income over $10 million or (ii) $287,000.

Personal service corporations would have been subject to a flat corporate tax of 26.5 percent.

If any of these provisions pass in the final legislation, depending on projected 2021 taxable income, it may be beneficial to hold off on collecting income in 2021 and accelerate deductions for corporations expecting to be in the lowest graduated bracket. Conversely, a corporation expecting to be in the 26.5 percent bracket may want to defer deductions and try to speed up the collection of income in 2021.

Personal service corporations would benefit from accelerating income in 2021, while deferring deductions to 2022.

Should these provisions come to life in future negotiations of the Build Back Better Act, it remains a good idea to have a strategy in place so taxpayers can act swiftly as needed.

Observation—While the current corporate tax rate of 21 percent may seem more advantageous than the current personal income tax of up to 37 percent paid on pass-through income, the corporate tax structure may not be advantageous for owners of closely held business established as S corporations, limited liability companies or partnerships. While corporations may currently enjoy a lower tax rate on their profits, shareholders will encounter a second tax on dividends distributed to them. The profit of a corporation is taxed to the corporation when earned and then taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not receive a tax deduction when it distributes dividends to shareholders and shareholders cannot deduct any losses of the corporation. Alternatively, income earned by pass-through entities is taxed only once at the owner level.

Another benefit to the pass-through structure of limited liability companies and partnerships is their flexibility for allocating income/loss and distributing cash/assets. The owners must agree on the allocations, and the allocations must have substantial economic effect. In addition, limited liability companies and partnerships are generally easier to form, manage and operate. They are less regulated in terms of laws governing formation because the owners control the way the business operates.

Businesses, particularly those in service industries that are excluded from the proposed pass-through deduction, should consider if electing C corporation status would be a more favorable structure. Companies that generate significant income, reinvest in their business and do not distribute cash to investors could see a benefit of a lower corporate tax rate. Further, transitioning to a C corporation may be advantageous if you anticipate long-term ownership. However, owners considering a transition to a C corporation should also be mindful of the accumulated earning tax (20 percent tax on companies maintaining too much cash) and the personal holding company tax (25 percent penalty on undistributed passive income earned in a closely held C corporation).

77. Evaluate your sales tax exposure. In light of the South Dakota v. Wayfair, Inc. United States Supreme Court decision, businesses should periodically review their operations to determine if they have additional sales and use tax exposure. Businesses that have large retail or e-commerce sales may be subject to sales or use taxes, even if they do not have a physical presence in the state or local jurisdiction. Accordingly, now is the time to perform an assessment of your business activities and make plans to become compliant (if warranted) in early 2022. We have conducted many such assessments and would be pleased to assist.

78. Evaluate your state tax exposure in light of telecommuting in a post-COVID work environment. In a post-COVID remote work environment, virtually every state has taken the position that having an employee present within a state creates nexus and will potentially subject the employer to business registrations, employee withholding, registered agent requirements and/or business tax filings.

As such, each state where you have an employee working remotely must be closely examined, as every state has different methods for apportioning taxable income, sourcing revenue, minimum factor presence standards and other registration requirements. We have conducted many such assessments and would be pleased to assist.

79. Review your plans to entertain clients. Since 2018, businesses have been unable to write off expenses associated with entertaining clients for business purposes. However, business meals paid concurrently with the entertainment expenses are still 50 percent deductible, provided these expenses are separately paid for or separately stated on the invoice.

In addition, the Consolidated Appropriations Act of 2021 provided a temporary 100 percent deduction for business meals provided by a restaurant for the 2021 and 2022 tax years. This expanded deduction lapses on January 1, 2023.

Observation—The term “restaurant” is defined as “a business that prepares and sells food or beverages for immediate consumption, regardless of whether the food or beverages are consumed on the premises.” Additionally, establishments that sell prepackaged food that is not intended for immediate consumption are still subject to the 50 percent limitation. A few examples of businesses that do not meet the definition of a restaurant are: grocery stores, specialty food stores, liquor stores and convenience stores.
Planning Tip—Entertainment activities with clients should be reviewed before year-end to determine their deductibility for 2021. The deduction for meals is preserved, so to the extent possible be sure to break out on the invoice the food portion of any entertainment expense incurred, determine if the establishment qualifies as a “restaurant” under the new law and, as always, maintain contemporaneous logs or other evidence of the business purpose of all meals and entertainment expenditures. This may require enhanced general ledger reporting to minimize effort in segregating deductible and nondeductible meals and entertainment expenses.

It is important to remember that a companywide activity such as a holiday party or team building event is still deductible in full. Also 100 percent deductible are the costs of food or drinks provided to the public free of charge. Meals brought in for employees working late or for department meetings remain subject to the 50 percent limitation.

80. Strategically time purchases of business property. For 2021, businesses can expense, under IRC Section 179, up to $1,040,000 of qualified business property purchased during the year. This $1,040,000 deduction is phased out, dollar for dollar, by the amount that the qualified property purchased exceeds $2,590,000.

Generally, qualified business property for purposes of Section 179 includes tangible personal property used in a trade or business, as well as nonresidential qualified improvement property, including, but not limited to: roofs, HVAC systems, fire protection and alarm systems and security systems. The qualified improvement property must also be placed in service after the date of the real property in order to qualify for accelerated depreciation under Section 179.

Additionally, bonus depreciation can be claimed on 100 percent of qualified new or used property placed in service during the year, and the first year bonus depreciation on passenger automobiles (vehicles with gross vehicle weight less than or equal to 6,000 pounds) is currently $8,000. Bonus depreciation of 100 percent under the new law is available for property placed in service after September 27, 2017, and before January 1, 2023. The definition of qualified property for purposes of bonus depreciation has been expanded to include the purchase of used property, so long as the taxpayer has not previously used the property (such as in a sale-leaseback transaction).

Qualified business property for purposes of bonus depreciation includes, but is not limited to, equipment and tangible personal property used in business, business vehicles, computers and office furniture and land improvements to a business, as long as the recovery period of the property is less than or equal to 20 years.

Planning Tip—For a vehicle to be eligible for these tax breaks, it must be used more than 50 percent for business purposes, and the taxpayer cannot elect out of the deductions for the class of property that includes passenger automobiles (five-year property).
Planning Tip—If you are making multiple purchases of qualified property, pick assets with longer depreciable lives to expense. By doing this, you will depreciate your other assets over shorter recovery periods, thus accelerating and maximizing your depreciation deduction.

81. Select the appropriate business automobile. For business passenger cars first placed in service in 2021, the ceiling for depreciation deductions is $10,200. Higher deductible amounts apply for certain trucks and vans (passenger autos built on a truck chassis, including SUVs and vans). Vehicles such as SUVs and vans with gross vehicle weight ratings of between 6,000 pounds and 14,000 pounds are restricted to a first-year deduction of $10,200, in addition to the $25,900 that is permitted to be expensed under IRC Section 179. Automobiles that are used 50 percent or more for business are also eligible for bonus depreciation of up to $8,000. For vehicles placed in service in 2021, the depreciation limitation for passenger automobiles is $10,200 for the year the automobile is placed in service, $16,400 for the second year, $9,800 for the third year and $5,860 for the fourth year and later years in the recovery period.

New Vehicle Depreciation in 2021


Passenger Automobiles

SUVs, Vans, Trucks

Maximum Section 179 allowed



Maximum bonus depreciation allowed



Year 1*



Year 2*



Year 3*



Year 4* and later




*Maximum amount of depreciation if electing out of or not qualifying for bonus depreciation and/or Section 179.

Illustration—If you purchase an SUV that costs $75,000 before the end of 2021, assuming the SUV would qualify for the expensing election, you would be allowed a $25,900 deduction on this year’s tax return. In addition, the remaining adjusted basis of $49,100 ($75,000 cost, less $25,900 expensed under Section 179) would be eligible for a bonus depreciation deduction of $49,100 under the general depreciation rules, resulting in a total first-year write-off of $75,000. This illustration also assumes 100 percent business use of the SUV.
Observation—Beware: Although the accelerated depreciation for passenger automobiles and SUVs is appealing, if your business use of the vehicle drops below 50 percent in a later year, the accelerated depreciation must be recaptured as ordinary income in the year business use drops below 50 percent.

Additionally, taxpayers are strongly urged to keep track of business miles through manual logs or digital apps in order to support business use of listed property.

82. Defer taxes with cost segregation. Cost segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce the federal and state income taxes they pay on their rental income. Property that is placed in service after September 27, 2017, and has a class life of up to 20 years will generally qualify for 100 percent bonus depreciation. Real estate that is nonresidential property is generally classified as 39-year property and is not eligible for bonus depreciation. A cost segregation study allows for the appropriate allocation of costs amongst various class lives and may permit the owners to take advantage of greater depreciation deductions (including 100 percent bonus depreciation). Further, by frontloading allowable depreciation deductions to the early years of the property’s life, reclassification can result in significantly shorter tax lives and greater tax deferrals.

83. Consider simplifying accounting methods. Prior tax law posed reporting complications for businesses with average gross receipts exceeding a certain threshold. In 2017, if average gross receipts exceed $5 million, taxpayers were not permitted to use the simpler cash method of accounting. Similarly, under prior tax law, businesses with average gross receipts of over $10 million were not able to account for inventories of materials and supplies, and taxpayers were forced to use uniform capitalization rules. Under the TCJA, the thresholds for both accounting methods were indexed for inflation and currently stand at $26 million for 2021.

Planning Tip—If your business’ income previously exceeded the thresholds, but falls beneath the higher thresholds for 2021, determine whether the increased thresholds would make a tax accounting change a useful strategy.

84. Determine the merits of switching from the accrual method to the cash method of accounting. The accrual (rather than the cash) method of accounting is generally used by businesses that sell merchandise to account for revenue and inventory related to the merchandise. While this may provide a more complete picture of the financial status of a business, from a tax perspective it provides much less flexibility in terms of planning options and is more difficult to use than the cash method of accounting. The good news is that for the year 2021, businesses with average gross receipts over the last three years of $26 million or less that would otherwise be required to use the accrual method of accounting can elect to use the cash method. A C corporation that is a qualified personal service corporation is also allowed to use the cash method, as long as it does not maintain inventories for tax purposes, regardless of annual gross receipts. While there are some caveats to obtaining this relief, it is a tax-saving strategy worth considering if your business can meet the average gross receipts test and is currently using the accrual method of accounting.

85. Select the most tax-efficient inventory method. If your business tracks inventory, you may be able to realize meaningful income tax savings based on your selected inventory method. For example, in a period of rising prices, like we are currently in, the use of the last in, first out (LIFO) method can produce income tax savings since it assumes that the higher priced inventory units purchased last were the first ones sold. Conversely, in a period of falling prices, the first in, first out (FIFO) method will provide larger tax savings since it assumes that higher priced inventory units purchased first are the first ones sold. The IRS requires you to select an inventory method the first year your business is in operation. If you decide to make a change, you must alert the IRS and gain approval for the first tax year that you adopt the new method. Professional assistance may be needed.

86. Establish a tax-efficient business structure. The structure of your business can impact your personal liabilities as well as your tax liabilities. Businesses may operate under various structures, including general partnership, limited liability company, limited liability partnership, S corporation, C corporation and sole proprietorship. The primary factors that distinguish one structure from another are owner liability and income taxation, but it is prudent to consider other characteristics as well. This decision should be carefully evaluated by you and your team of legal and tax advisers as it is one of the first decisions made when setting up a business.

Potential Legislation Alert—Prior versions of the Build Back Better Act included a temporary rule allowing S corporations in existence on May 13, 1996, to convert to a partnership anytime in calendar year 2022 or 2023 without triggering a tax liability. While this provision was stricken from the current version of the bill, it would be interesting to see if it makes another appearance before the bill becomes law.
Planning Tip—Self-employment taxes are rarely discussed during the formation of an entity, but should the entity choose a multimember LLC, careful structuring may help minimize the members’ exposure to self-employment tax. Generally, the income of multimember LLCs is taxed as a partnership and income flows through to the partners, who may be subject to self-employment tax. However, the income of limited partners is not usually subject to self-employment tax unless the payments are guaranteed payments for services rendered. The IRS further restricts who may claim the limited partner exception to self-employment tax based on the partner’s involvement and activity within the entity. In order to avoid such treatment, a number of steps can be taken at entity formation to protect against inadvertent self-employment tax. The LLC may wish to form a management company, make a spouse the majority partner in the LLC or establish multiple ownership classes. If you are forming an entity, you need to ensure you have a knowledgeable tax adviser in your corner in order to maximize planning opportunities.

87. Consider the benefits of establishing a home office. With more people now working from home than ever before, taxpayers may wonder if they now qualify for the home office deduction. Those taxpayers who own small businesses or are self-employed and work out of their home may very well have the ability to take advantage of the home office deduction if they heed the rules below. Currently, W-2 employees do not qualify to take the home office deduction.

Expenses related to your home office are deductible as long as the portion of your home that qualifies as a home office is used exclusively and on a regular basis as a principal place of business. This can be broken down into a few factors:

  1. You must use part of the home or apartment on a continuous, ongoing or recurring basis. Generally, this means a few hours a week, every week. A few days a month, every month, may do the trick. But occasional, “once in a while” business use won't do.
  2. To qualify under the exclusive use test, you must use a specific area of your home or apartment only for your trade or business. The area used for business can be a room or, preferably, a separately identifiable space. It cannot be the kitchen table, family room, den or playroom where clearly other nonbusiness activities occur.
  3. The area must be a place where you meet or deal with clients in the normal course of your trade or business, and the use of your home is substantial and integral to the conduct of your business. Incidental or occasional business use is not regular use, but this test may be met even if you also carry on business at another location.

A simplified home office deduction ($5 per square foot, up to 1,500 square feet) is also available to taxpayers, which minimizes expense tracking while providing a flat rate deduction per square foot of office space. In addition to claiming a deduction for home office expenses, the ability to qualify as a home office may enable you to deduct the cost of traveling between your home and other locations where you conduct business.

Observation—Take advantage of the home office deduction if you meet the requirements. Using your home or apartment for occasional meetings and telephone/videoconferencing calls will likely not qualify you to deduct expenses for business use, even if you are working there full time during the course of the pandemic. The exclusive use test discussed above may be satisfied while we are working remotely (if you are not working from the kitchen table). However, the regular test as a continuous, ongoing or recurring basis may not be met if you have been required to return to the office. At this point, we simply do not know under current guidance if regular use for a short period of time, but not thereafter, will pass scrutiny.

Also, there is a potential downside for claiming home office deductions. For example, on the sale of your home, home office depreciation previously claimed does not qualify for the exclusion of gain on the sale of a principal residence. Additionally, be sure you meet all the requirements for claiming a home office deduction, as this can be a red flag prompting IRS inquiry. It will be important to be proactive in your tax planning and maintain accurate record keeping.

88. Examine and properly classify your independent contractors and employees. The question of whether a worker is an independent contractor or employee for federal income and employment tax purposes is a complex one. It is intensely factual, and the consequences of misclassifying a worker can be serious. In general, the person (or entity) who controls how a job is performed is the employer. There are many factors requiring assessment to properly determine degree of control, as discussed below. Therefore, if the worker has control, the worker is self-employed and an independent contractor and is subject to self-employment taxes. On the other hand, if a worker is an employee, the company must withhold federal income and payroll taxes, pay the employer’s share of Federal Insurance Contributions Act taxes on the wages plus Federal Unemployment Tax Act tax, and often provide the worker with fringe benefits that are made available to other employees. There may be state tax obligations as well. Since these employer obligations do not apply for a worker who is an independent contractor, the savings can be substantial.

Observation—The IRS continues to intensely scrutinize employee/independent contractor status. If the IRS examines this situation and reclassifies the worker as an employee, not only are employment taxes due, but steep penalties will be assessed. The IRS’ three-category approach (i.e., behavioral control, financial control, type of relationship) essentially distills the 20-factor test the IRS had used to determine whether a worker was an employee or an independent contractor. The gig economy is also changing the landscape, as it is challenging the use of traditional criteria to assess a worker’s classification. Consider seeking professional guidance to review of your worker classifications.

89. Maximize business deductions and minimize employee taxable income by establishing an accountable expense reimbursement plan. An accountable plan reimburses employees for work-related expenses by utilizing specific reporting, substantiation of business expenses and return of any excess cash advances. Employers are allowed to deduct, and employees are allowed to exclude from gross income, employer expense reimbursements if paid under an accountable plan. Since both the employer and employee benefit from establishing an accountable plan, the need to specifically track expenses is usually worth the minimal extra effort over a nonaccountable plan.

Observation—An accountable plan is a process of reimbursing an employee for business-related expenses, and therefore not included in compensation and ultimately not considered taxable income. The costs must be business-related, therefore, it is imperative to maintain segregated and accurate accounting of expenses. Examples of reimbursable expenses can be the business use of a cellphone or professional dues associated with one’s career. The key is to develop a reimbursement process that is consistent and well documented within the organization.

90. Lower your effective tax by employing your child (or grandchild). You can employ your children (or grandchildren), which shifts income from you to them―and typically subjects the income to the child’s lower tax bracket and may actually avoid tax entirely (due to the child’s standard deduction). Since this is not investment income, the earned income is not subject to the kiddie tax. There are also payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both Social Security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. (See item 45.)

Observation—When employing your child or grandchild, keep in mind that any wages paid must be reasonable given the child’s age and work skills. Also, if the child is in college or entering soon, excessive earned income may have a detrimental impact on the student’s eligibility for financial aid.

91. Don’t overlook your business tax credits. Credits are dollar-for-dollar reductions in tax and are much more valuable than deductions. Employers can claim the work opportunity tax credit, which is equal to a percentage of wages paid to employees of certain targeted groups during the tax year. Other credits, such as the retirement plan tax credit, may also be available, but certain actions must take place before year-end to qualify. Employers can also receive tax credits for other employee provided services such as child care facilities/services, making improvements so businesses are accessible to persons with disabilities and providing health insurance coverage to employees.

92. Conduct a research and development (R&D) study to maximize your R&D tax credit. The R&D credit may be claimed by taxpaying businesses that develop, design or improve products, processes, formulas or software. Many states also have an R&D credit.More industries and more activities now qualify for the R&D tax credit than ever before. Businesses of all sizes should consider accelerating research and development expenses, including qualified software development costs, prior to year-end.

93. Generate payroll tax credits with the R&D tax credit. While it is generally known that the R&D tax credit can be applied to income taxes and the AMT (as long as certain requirements are met),qualified small businesses can also use the R&D tax credit against their Social Security payroll taxes. To qualify for this credit, a small business must: (a) have gross receipts of under $5 million for the current tax year; (b) have had gross receipts for five years or less, including the current year; (c) have qualifying research activities and expenditures; and (d) incur payroll tax liabilities. Businesses can generate up to $250,000 in payroll tax credits per year for five years, and any unused portion can be carried forward to future years. The payroll tax credit election may especially benefit eligible startup businesses having little or no income tax liability. Contact us for assistance in determining activities eligible for these incentives and the assessment of the appropriate documentation required to support your claim.

94. Perform a compensation study. Businesses can maintain deductibility, yet avoid payroll taxes, on compensation moved from salary to fringe benefits. Employees will enjoy the tax savings resulting from lower taxable compensation. Benefits typically shifted include medical insurance and employee discounts. This may be a positive way to attract and retain employees. It is important to note, however, that transportation fringe benefits are not deductible by the employer unless included in the employee’s W-2 wages.

Planning Tip—In this competitive employee market, employers are finding it necessary to increase both wages and benefits. One terrific tool is the $5,250 employer-provided tuition assistance reimbursement. Your employees will benefit from untaxed compensation, while the employer utilizes a compensation tool not subject to employment taxes. (See item 107 below.)

Utilizing a qualified plan for employee expense reimbursements is another way both employer and employee may enjoy tax-advantaged benefits, while also potentially helping the employer save on office expenses. We would be happy to help ensure your plan meets IRS requirements.

Also consider paying dividends in lieu of owner salaries in a family-owned C corporation. If you personally expect to be in the 32 percent or higher tax bracket for 2021 and you own a C corporation, you could net more cash after taxes by paying yourself some dividends in lieu of additional salary. This is because dividend income is subject to a maximum 20 percent tax rate, while your salary is subject to your 32 percent or higher tax rate, plus you and your corporation must pay payroll taxes on your salary.

Observation—Any dividends paid to you must be paid to other owners as well. This is ideal in the context of a family-owned C corporation, since a family recipient who is in the 10 percent or 12 percent tax bracket (which many children are) will not pay taxes on this dividend income. On the other hand, however, if there are multiple nonfamily member shareholders, paying dividends could alter the bottom-line cash flow available to the various shareholders, which may make this strategy unworkable in some situations.

95. Enhance employee health by establishing health savings accounts (HSA) and other cafeteria plans (i.e., Section 125 plans or flexible spending accounts). These plans provide an IRS-approved way to lower taxes for both employers and employees, since they enable employees to set aside, on a pretax basis, funds from their paychecks for adoption expenses, certain employer-sponsored insurance premium contributions, dependent care costs and unreimbursed medical expenses. Furthermore, Section 125 plans are permitted to offer salary-reduction HSA contributions for eligible employees as part of the menu of plan choices. Thus, employers can sponsor the HSAs and employer contributions are not subject to income or employment taxes.

Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes, with the notable exceptions of California and New Jersey (at maximum rates as high as 11 percent), resulting in a tax savings of as much as 55.65 percent. As a result, the employer also pays less in Social Security matching tax. Like an accountable expense reimbursement plan, it can assist an organization in achieving its strategic goals by enhancing its ability to attract and retain talented, experienced people. Since many restrictions apply, you should carefully review this arrangement before instituting a plan.

Planning Tip—Employees should consider reviewing their beneficiary information and naming their spouse as beneficiary of their HSA, as the surviving spouse is not subject to income tax on distributions as long as they are used for medical expenses. Anyone other than the spouse will be taxed on the balance remaining in the HSA upon the account owner’s death.

96. Draft a succession plan. In the event of death, disability or retirement of a business owner, a strategy must be in place for the transfer of the business to new ownership. Failure to properly plan for an ownership transition can not only turn a successful business into a failed business, but it can also create a greater tax burden. You will need to identify candidates for leadership as well as ownership roles, while also considering estate and gift tax consequences. Together with your lawyer, CPA and financial advisers, you can transfer control as desired, develop a buy-sell agreement, create an employee stock ownership plan and carry out the succession of your business in an orderly fashion.

97. Deduct your business bad debts. It is prudent to examine your receivables before year-end, as business bad debts are treated as ordinary losses and can be deducted when either partially or wholly worthless. Do not pour salt into the wound by paying income tax on income you will never realize; not being paid for services or merchandise that you have sold is bad enough.

98. Do not become trapped by the hobby loss rules. If your business will realize a loss this year, you need to consider the so‑called hobby loss rules to ensure that the business is treated like a business, not a hobby, and that the loss will be deductible. If an activity results in a profit in three out of the last five years, it will be assumed to be for profit and not a hobby. Even if the activity is not for profit, the income must be included on your tax return, though the income may not be subject to self-employment taxes.

99. Sell your company’s stock, rather than its assets. If you are considering selling your business, try to structure the transaction as a sale of the company’s stock, rather than as a sale of the company’s assets. A sale of your company’s stock will be treated as the sale of a capital asset and the preferential long-term capital gain rates will apply. A sale of the company’s assets, on the other hand, will typically result in at least some of the gain being taxed at the much higher ordinary income tax rates. However, since the buyer will generally want to structure the transaction as a purchase of the company’s assets in order to increase his or her depreciation deductions, some negotiating by both parties should be expected.

Utilizing an installment sale is another potential tool to help defer gain or spread the income into multiple years and potentially benefit from lower rates.

100. Consider installment sale treatment for sales of property at a gain. When property is sold, gain is generally included in income when the asset is sold. The installment method is required in cases where there is a sale of property and the seller receives at least one payment after the year in which the sale occurs, typically deferring a substantial part of the tax on the sale to later years. Under the installment method, gain is recognized ratably over multiple years on the sale to the extent payments are made on the installment note, subject to a gross profit computation. This method allows you to recognize gain only to the extent of payments actually received, and is a valuable method to defer income. If cash is being received over multiple years and you do not want to use the installment sales method to report the income, an election is available to “elect out” of the installment sale treatment and pay the entire amount of tax due on the gain in the year of sale. You have until the due date of your return (including extensions) to elect out of installment reporting. In addition, not all states recognize this type of gain treatment, so the state tax effects also need to be considered.

Planning Tip—The IRS also imposes an additional interest charge on installment sale obligations if the total amount of the taxpayer’s installment obligations at the end of the tax year exceed $5 million. The interest charge is assessed in exchange for the taxpayer’s right to pay the tax on the installment sale income over a period of time.
Planning Tip—Many types of transactions are not eligible to be reported under the installment sale method. These transactions include a sale at a loss, sales of stocks or securities traded on an established securities market, and a gain that is recaptured under section Code Section 1245. If an ordinary gain is incurred through depreciation recapture, it is recognized in the year of the sale even is no cash is received.

101. Set up a captive insurance company to realize insurance cost savings. For certain groups, setting up a small “captive” insurance company, which is owned and controlled by the insureds, may result in insurance savings, particularly when there is a high loss ratio anticipated from claims. In addition, small captives qualifying under the Internal Revenue Code 831(b) (known as “microcaptives”) pay income tax only on investment income, not underwriting income, and have dividends taxes as qualified dividends. Note that Section 831(b) does contain some restrictions; for example, the insurance company must have net written premiums (or, if greater, direct written premiums) for the taxable year that do not exceed $2.2 million. Generally, these captives are set up among related companies, companies within the same industry or companies affiliated with some association.

102. Lease modifications may generate unintended tax consequences. IRC Section 467 was originally enacted as an anti-abuse provision to prevent tax shelters that took advantage of certain timing differences. Leases can be governed under Section 467 in the event of modification, and can result in the inclusion of income if lease terms are substantially modified by:

  • Increasing/decreasing the lease payments;
  • Shortening/extending the lease term; and/or
  • Deferring/accelerating lease payments due.

Moving forward, lease modifications will remain a very complicated issue. It is important to remember that regardless of modifications caused by the economic downturn, leases must be reported on an accrual basis. Comprehensive contract analysis and Section 467 testing will be required on a case-by-case basis as lessors and lessees continue to navigate the rapidly evolving economic landscape.

103. Fly solo with a one-participant 401(k). A solo 401(k) is a one-participant 401(k) similar to a traditional 401(k), except that it covers only the business owner or owner plus spouse. These plans have the same rules and requirements (for the most part) as any other 401(k) plan. The business owner is both employee and employer in a 401(k) plan, and contributions can be made to the plan in both capacities allowing for employer contributions, elective deferrals and catch-up contributions. For 2021, the solo 401(k) total contribution limit is $58,000, or $64,500 if you are age 50 or older. The owner can contribute both:

  • Elective deferrals up to 100 percent of compensation (earned income in the case of a self-employed individual) up to the annual contribution limit ($19,500 for 2021 or 2020, plus $6,500 if age 50 or older); and
  • Employer nonelective contributions up to 25 percent of compensation as defined by the plan (for self-employed individuals the amount is determined by using an IRS worksheet and in effect limits the deduction to 20 percent of earned income).
Planning Tip—Because solo 401(k) plans cover only highly compensated employees (i.e., the owner) they are not subject to the actual contribution percentage (ACP) and actual deferral percentage (ADP) tests and can therefore be easier and less expensive to maintain than other 401(k) plans.
Observation—It is important to keep track of the value of the assets within a solo 401(k). Though they do not require ACP or ADP testing, one-participant 401(k) plans are generally required to file an annual report on Form 5500-EZ if the plan has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement. Please track and report to the fund administrator the asset value and make sure any Forms 5500 are timely filed. If you have an established solo 401(k) plan, experienced significant appreciation due to market gains and are unsure if a Form 5500 has been filed, please contact your tax adviser as soon as possible.

104. Authenticate your business expenses. You must be ready to prove to the IRS, state or even local tax authority anything you put on a tax return. In particular, certain expenses like travel, meals, transportation expenses, gifts, entertainment (if applying to state or wages of employee) and those expenses associated with listed property (e.g., vehicles) are subject to more specific and demanding rules regarding substantiation and documentary evidence. Deductions in these categories can be disallowed, even if valid, if the below contemporary evidence is not properly maintained for the expense:

  1. The amount of the expense.
  2. The time and place of travel (or entertainment).
  3. The business purpose.
  4. For gifts, the date and a description of the item given and the business relationship to the taxpayer of the person receiving the gift.
  5. The business relationship to the taxpayer of the person receiving the benefit.
Planning Tip—To meet the adequate records requirement, you could maintain (1) an account book, diary, log, statement of expense, trip sheets or similar record and (2) documentary evidence that, in combination, are sufficient to establish each element of an expenditure or use for travel or entertainment. However, it is not necessary to record information in an account book, diary, log, statement of expense, trip sheet or similar record that duplicates information reflected on a forms of documentary evidence as long as they complement each other in an orderly manner.

Documentary evidence (paid bill, written receipt or similar evidence) is required to substantiate all expenses of $75 or more. A written receipt is always required for lodging while traveling away from home, regardless of the amount. However, for transportation charges, documentary evidence is not required if not readily available (e.g., cab fare).

Observation—A credit card statement is not sufficient documentary evidence of a lodging expense. Instead, a hotel bill showing the components of the hotel charge is required.

105. Enjoy relief for MEPs. A multiple employer plan (MEP) generally is a single plan maintained by two or more unrelated employers. Before 2021, these plans could run afoul of the “one bad apple rule” when one employer (or the plan itself) fails to satisfy an applicable qualification requirement resulting in the disqualification of the plan for all employers. For plan years beginning after December 31, 2020, relief from the “one bad apple” rule is provided for “covered multiple employer plans.” For 2021 and moving forward, unrelated employers are more easily able to band together to create a single retirement plan.

Observation—A single, multiple employer plan can provide economies of scale that result in lower administrative costs than would otherwise apply to a group of separate plans covering the employees of different employers. However, concern that a violation by one or more employers participating in the plan may jeopardize its tax-favored status or create liability for other employers may have discouraged use of multiple employer plans in the past. With this rule change, Congress believes employers in a multiple employer plan should not be subject to the risk that any inadvertent or unintentional violation by a noncompliant plan member could result in negative tax consequences for the employer members that are compliant.

106. Claim a small businesses credit for starting a pension plan. In the current environment where retaining good employees is critical for business survival, Congress has allowed a credit equal to 50 percent of certain costs incurred when setting up a pension plan for employees. The credit is generally limited to $250 per employee per year, but the limit is no less than $500 and no more than $5,000. So, if you spend $12,000 this year in establishing a plan, and $11,000 in the next two years on administration and employee education, you would be eligible for a $500 credit against your taxes in each of those three years if you have one employee, a $1,250 credit if you have five employees and a $5,000 credit if you have 25 employees. (Before 2020 the limit was $500 a year and did not increase based on the number of employees.)

To qualify for this credit, taxpayers must:

  • Have no more than 100 employees who received at least $5,000 of compensation in the year before starting the plan;
  • Have at least one employee participate in the plan who meets the definition of a “nonhighly compensated employee”; and
  • Not have had a pension plan during the three tax years right before the year in which the plan starts.
Planning Tip—Businesses that have had a pension plan in the last couple of years may consider waiting three years from the time the plan was terminated before starting a new plan in order to qualify for the credit. As an example, if you had a plan that was terminated in 2019, you would have to wait until 2023 to start a new plan and qualify for the credit.
Observation—There are several types of plans you can establish for your employees and still qualify for the credit. For example, you could start a pension, profit sharing or an annuity plan, among other choices. If you think the time is now to establish one of these plans, please reach out to your tax adviser.

107. Reward past employee education with an excluded tax benefit. Do you want to help ease the minds of your employees while retaining their talent and recognizing the costs incurred for them to obtain that talent? The CARES Act originally allowed employers to exclude from an employee's gross income any payments made by an employer of principal or interest, up to $5,250, on any qualified education loan incurred by the employee until the end of 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, which is part of the Consolidated Appropriations Act of 2021, extends this treatment through December 31, 2025. Qualified student loan payments must be aggregated with any other educational assistance received by the employee when applying the statutory maximum of $5,250.

Planning Tip—Prior to March 27, 2020, any student loan repayment could not be excluded from an employee’s income. With the extension of this exclusion, if you are seeking to retain talented employees with varying levels of student loans, this is a great avenue to reward your employees tax-free. They will feel compensated by receiving a debt payment on their outstanding loans while incurring no gross income.

108. Utilize a private foundation to accomplish charitable goals. While donor-advised funds are increasingly popular among philanthropic individuals, private foundations may offer certain advantages to families looking to create a multigenerational plan for charitable giving. Since private foundations can exist in perpetuity, they are an excellent vehicle to carry on a founder’s family name. Generally, donor-advised funds are not legally separate from the 501(c)(3) sponsoring organization, and may have time limits. Further, while donor-advised funds usually follow a donor’s direction in gift giving, they are not legally required to. Private foundations may provide donors with greater flexibility in gift giving.

However, private foundations are not without their limitations. Excise taxes are assessed annually on investment income, and foundations must distribute 5 percent of their assets each year. As of last year, the excise tax rate for private foundations was reduced to 1.39 percent of net investment income, rather than the previous 2 percent with a further reduction to 1 percent in certain cases.

Potential Legislation Alert—The bipartisan Accelerated Charitable Efforts Act was introduced in June 2021. This initiative proposes to change certain rules around the 5 percent minimum distribution requirement so that salaries or travel expenses paid to foundation family members do not count as charitable distributions. The proposal also includes a provision so that distributions by private foundations to donor-advised funds would not count against the 5 percent minimum distributions requirement. This would end the ability of a private foundation to meet this requirement using donor-advised funds. Lobbying both for and against this bill continues, as the bill remains with the Senate Finance Committee for consideration.

We can assist you, based on your unique situation, in determining whether a private foundation is a good fit for you.

109. Beware of the recapture of tax benefits on property not used for an exempt purpose. When a donor makes a charitable contribution of tangible personal property that is not used for exempt purposes, and the donor originally claimed a deduction for the fair market value of the property, the donor’s tax benefit may need to be adjusted.

Under the provision, if a donee organization disposes of applicable property within three years of the contribution of the property, the donor claimed a deduction of more than $5,000 and the organization does not certify that the property was substantially used for the organization’s exempt purpose or the intended use became impossible, the donor is subject to a tax benefit adjustment.

If the donation is significant, the donor may consider formalizing the donee organization’s strategy regarding the property, or agreeing to indemnify the donor.

A $10,000 penalty applies to a person that identifies applicable property as having a use that is related to either a purpose or function of the organization constituting the basis for the donee’s exemption knowing that it is not intended for such use.

110. Ensure that your private foundation meets the minimum distribution requirements. A foundation is required to distribute approximately 5 percent of the average fair market value of its assets each year. Qualifying distributions meeting this requirement include grants and certain operating expenses. Penalties are imposed in the form of an excise tax on the foundation if it fails to make qualifying distributions within 12 months after the close of the tax year.

111. Review your estate plan documents. Despite the TCJA doubling the estate, gift and generation-skipping transfer unified credit, wealth transfer strategies are still important. If you have not examined your estate plan within the last few years, you should consider doing so immediately. Without intervention, the favorable changes enacted by the TCJA will lapse back to their pre-2018 amounts at the end of 2025 (the unified credit will be reduced by over $6 million after considering inflation). In addition, the Biden administration has cited specific items related to estate tax laws that they plan to address during their term, which, if enacted, would further subject affluent taxpayers to these taxes. However, it is worth mentioning that the estate tax law changes favored by the administration are not actively being pursued in any immediately forthcoming legislation.

While addressing your will, also consider the benefits of a living will, medical power of attorney, healthcare directives, durable power of attorney and the appropriateness of your beneficiary designations on your retirement accounts and life insurance policies.

Planning Tip—One easy step to take in reducing your estate’s exposure to the estate tax is to make annual gifts before the end of the year. In 2021, an unmarried donor may make a gift of $15,000 to any one donee, and a married donor may make a gift of $30,000 to any one donee as the gift can be considered split with his or her spouse, without using any of their unified credit or incurring a gift tax. Thus, a gift of $60,000 may be made by a husband and wife to another married couple, free of gift tax and with no impact on the unified credit. In 2022, the annual gift tax exclusion increases to $16,000, so a married couple will be able to similarly gift $32,000 to an individual, and $64,000 to a married couple. Additionally, the IRS has issued a regulation that stipulates that all gifts sheltered under the current rules will remain so even after the law is changed. This means that if a reduction in the unified credit occurs, either due to the sunset of the TCJA or the passage of new legislation, and the taxpayer gifts over $10 million under the current rules, they would not be retroactively taxed if they pass away once the unified credit is lower.

Further, medical and education expenses paid directly to the providing institution are not subject to gift tax. In addition, as indicated in the education planning section of this guide, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment, as discussed earlier in item 51. A substantial tax reduction can be achieved by making gifts to your child(ren) or grandchild(ren).

112. Take advantage of current exclusions. As discussed above, the annual gift tax exclusion will remain at $15,000 for 2021, though it increases to $16,000 in 2022. The estate and gift tax unified credit will increase from $11,700,000 in 2021 to $12,060,000 in 2022. For both simple and complex trusts, grantors should consider funding in 2021 to take advantage of this credit, as it may continue to face political pressure in the future and is scheduled to sunset on January 1, 2026.

Illustration—Gifts are generally only subject to the gift tax in very limited circumstances. For example, say Sarah funds an irrevocable trust for the benefit of her grandchild. Sarah was never married. In 2021, she contributes $7 million to the trust. The first $15,000 of any present interest gift in 2021 can pass freely to the recipient, without any gift tax reporting obligation. When the gift exceeds the annual exclusion amount, a gift tax return must be filed for the year, but no gift tax is paid unless the gift exceeds Sarah’s remaining lifetime unified credit. Since Sarah has made no gifts exceeding the annual exclusion amount during her lifetime and has never filed a gift tax return to reduce her unified credit, she would reduce her $11.7 million credit by $6,985,000, resulting in no taxable gift, no tax liability and the removal of appreciated assets from her estate. (The entire amount of the $7 million gift was offset by the unified credit.)




Less: Annual exclusion


Less: Unified credit


Taxable gift


Gift Tax Due


Credit before gift


Credit used toward gift

$6,985,000 (a)

Credit remaining


(a) $7,000,000 gift less annual exclusion of $15,000 = $6,985,000 credit used

Potential Legislation Alert—As previously mentioned, while we do not anticipate any significant changes to the aforementioned estate tax laws in the immediate future, it is possible that the current administration may circle back to these items, particularly while the Democrats control both chambers of Congress. Here are a few changes that the Biden administration had proposed in prior versions of their agenda earlier in the year:
  • Reduction of the estate, gift and generation-skipping transfer unified credit from $11.7 million to $3.5 million
  • Increase the top estate tax rate to 45 percent
  • Eliminate the basis step-up to date of death value for inherited property

This proposed reduction in the unified credit amount by more than 70 percent would have subject many more taxpayers to the estate tax. Currently, the step-up in basis at death allows for the value of an asset (such as a stock) as of the date of death to be applied as the new basis for the inheritor. This can significantly reduce or completely eliminate any capital gain on the disposition of the asset. The dissolution of the step-up rule would have resulted in large increases in capital gains for many taxpayers inheriting assets. Further compounding this issue is the intent by the Biden administration to also raise the tax rate on capital gains to ordinary rates for taxpayers exceeding $1 million in income. As you can imagine, if just one of the proposed changes mentioned above were to be included in any final legislation, it would prove to be extremely impactful to wealthy taxpayers looking to maximize the amount of wealth passed on to the next generation.

Observation—Even before the election of President Biden, there was a certain fear that taxpayers passing away after 2025 who had gifted more than the inflation adjusted $10 million exclusion would face a “clawback” of the gift tax exclusion upon death. Fortunately, as mentioned above, the IRS has released final regulations stating that, to the extent a higher basic exclusion amount was allowable as a credit in computing gift tax during the decedent’s life, the sum of these credits used during life may be used as a credit in computing the decedent’s estate tax. For example, due to this regulation, if a taxpayer utilized the entire $11.7 million credit available in 2021 gifts, should the credit be reduced to say $5 million in 2022, the entire gift of $11.7 million would be excluded at the taxpayer’s death in 2022 or beyond. Thus, it may make sense to fully utilize the current credit, especially if you anticipate a change to the estate tax.
Planning Tip—All of the strategies and observations noted in this guide are aimed at minimizing your income and gift tax costs. In other words, it is important that you ensure that your current and future wealth is not unduly diminished by those taxes. We strongly recommend that you consult with estate planning professionals to discuss topics such as gift, estate and generation-skipping transfer tax unified credit, the unlimited marital deduction, each spouse’s credit and related items.

113. Considering gifting income-producing or appreciated property. By gifting income-generating or appreciated property in lieu of cash, the donor can accomplish three important benefits. First, and most importantly, the gift will serve the purpose of assisting the donee. Second, if the donee is in a lower tax bracket than the donor or exempt from the NIIT, the donor and donee will likely experience some collective tax savings by shifting the income to a lower bracket. Third, the value of the gift is also removed from the transferor’s estate. This is an easy, effective way to pass on wealth.

114. Consider making payments for tuition or medical expenses. Medical and education expenses paid directly to the providing institution are not subject to gift tax and generation-skipping transfer tax rules. Also, any such payments do not count toward the taxpayer’s annual gift tax exclusion. In addition, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment. For example, should a grandparent make tuition payments and utilize up to the $15,000 gift exclusion to a grandchild(ren), the yearly tax savings could be significant.

115. Utilize a spousal lifetime access trust (SLAT) to take advantage of current high unified credits. As we mentioned previously, it is likely that the unified credit is near its historical peak. It is highly likely that even if the estate tax is not modified in next five years, the current credit will sunset in 2026 and revert to an inflation adjusted $5 million. In order to take advantage of the current credit, married persons can each gift the amount of the credit to a SLAT, utilizing the credit on the gift and paying no gift tax. In a SLAT, after the donor spouse gifts to the trust, the donee spouse has the right to receive distributions from the trust, thus preserving access for the couple to the trust assets if necessary. However, if principal is removed from the trust, the SLAT assets will be brought back into the estate, defeating the original intent of forming the SLAT―so exercise caution when taking distributions. When the donor spouse dies, the assets in the trust (and subsequent appreciation) are not subject to the estate tax.

Planning Tip—If you are trying to provide for a nonresident spouse, a qualified domestic trust (QDOT) may be appropriate. Under the estate tax, a noncitizen surviving spouse is generally not entitled to the same marital deduction afforded to citizen spouses. To get around this, the U.S. spouse can transfer assets to a QDOT during their lifetime, and upon death, the assets in the QDOT will not be subject to estate tax. Rather, the estate tax bill is deferred. The surviving spouse may receive income from the trust but any distributions of principal may be subject to estate tax, except in certain hardship situations. Upon death of the surviving spouse, the assets of the QDOT will finally be subject to the estate tax. Incidentally, the annual exclusion for gifts to a noncitizen spouse is increasing from $159,000 in 2021 to $164,000 in 2022.

116. Consider use of a grantor retained annuity trust (GRAT) for inter vivos wealth transfer. In a GRAT, a grantor contributes assets to a trust while retaining annuity payments for a defined period of time, with the remainder payable to beneficiaries. Depending on the structure of the GRAT, one can achieve maximum wealth transfer with little to no gift tax effect or use of the lifetime exclusion. However, should the grantor pass away prior to the completion of the annuity payments under the GRAT, at least a portion and possibly all of the GRAT assets are includible in the grantor’s estate. Thus, by terminating the annuity and trust before December 31, 2025, when the new higher federal estate tax threshold is set to expire, one can reap all of the benefits of a GRAT with minimal risk, while retaining the use of the grantor’s applicable exclusion amount.

Observation—GRATs generally perform best in low-interest rate environments. While we are still in a period of historically low interest rates, rising interest rates may cause GRATs to lose some of their luster. Additionally, GRATs remain a conservative way to manage valuation risk.
Planning Tip—Another way to retain access to an asset while passing it down to the next generation is by utilizing a qualified personal residence trust (QPRT). By transferring a house to a QPRT, the grantor can continue to live in the home for a specified period, after which the home passes to the beneficiaries. At this point and depending on the terms of the trust, the grantors may pay rent to remain in the home. The gift of the future interest in the home to a QPRT allows the grantor to gift the home to the trust for a discounted value, using less of the exclusion, and shields future appreciation of the home from the estate tax.

117. Gift or sell assets to an intentionally defective grantor trust (IDGT). Traditionally, donors would gift assets to an IDGT, which would result in a completed gift during their life, using some of their gift tax exemption, but shielding appreciation in the assets from the estate and gift taxes. As such, this is best accomplished by gifting assets that are expected to increase in value the most.

118. Utilize a charitable remainder trust (CRT) or a charitable lead trust (CLT) to transfer wealth and benefit charity. As you would expect, both trusts involve the donation of a portion of the assets transferred into the trust to charity, but the timing and functions of both are very different. Both a CLT and CRT permit the donor to remove the asset from their estate. The differences arise in the areas of recipients of the annuity payments and the distribution of the remaining funds.

A CRT is created to ensure the donor’s financial future. Under a CRT, appreciating assets such as stocks are provided as the principal and the donor can earn income on it, even though the asset is no longer considered as part of the estate. Upon the donor’s death, the asset is then passed on to the charitable organization.

A CLT is predominantly focused on the tax-efficient distribution of the donor’s wealth to beneficiaries. First, the donor makes a taxable gift equal to the present value of the amount that will be distributed to remainder beneficiaries. In a CLT, the charities “lead” and receive the annual annuity payments. The amount remaining at the completion of the term is then distributed to the beneficiaries. The benefit of this type of trust is threefold; it allows for the reduction in the value of the settlor’s estate, while also providing for charities and beneficiaries.

Planning Tip—With the potential chatter to eliminate the lower and more favorable tax rate for long-term capital gains and qualified dividends on income over $1 million from 20 percent to 39.6 percent, funding a substantial sale to a CRT in 2021 may create more risk than desired. Careful planning is needed here.

119. Review trust residency qualifications often. The most difficult aspect of trust residency is that each state has different rules and qualifications for determining whether a trust is a resident or nonresident. For example, most trusts created by a will of a decedent or that was funded while the donor was considered a resident of Pennsylvania are considered resident trusts. However, a state like Kansas only considers a trust a resident if it is administered in the state. Each state and situation differs for trust taxation. There is a myriad of other factors that may impact the nexus of a trust, such as beneficiary and/or trustee residence. We recommend contacting your tax adviser in any questions regarding trust residency.

120. Intra-family loans can prove to be beneficial for both the borrower/donee and the lender/donor. In this situation, the lender would be required to charge the minimum applicable federal rate (AFR). As of December 2021, that rate ranged between 0.33 percent and 1.9 percent, depending on the term, which, while slightly higher than the historic lows reached in 2020 due to the pandemic, is still considered to be low historically. A donor could choose to loan a beneficiary money, receiving the currently low AFR rate in return, while the beneficiary invests the proceeds. As long as the investment earns more than the interest paid, the donor has been able to transfer the appreciation on the assets to the beneficiary while avoiding gift taxes or use of the unified credit.

Alternatively, a donor could loan a beneficiary money to buy a home. With average mortgage rates estimated anywhere between 2.5 percent and 4 percent, there is significant room to make an arrangement beneficial for both parties. For the donee, if the loan is secured and properly recorded, it could be deductible on their tax return, while likely paying significantly less than what would be charged by a typical lending institution. For the donor, the mortgage could very well generate a better rate of return than a standard investment could, all while secured by real property.

121. Consider the benefits on a revocable living trust. In most cases, wills are written up to determine how assets are distributed upon death. However, revocable trusts can provide numerous advantages that may make them more beneficial than wills. One significant advantage is the avoidance of probate. Probate is the process of the legal administration of a person’s estate in accordance with their will or state law in the event there is no will in place. Having a revocable trust eliminates any uncertainty in connection with the probate process. Other benefits of revocable trusts are the addition of privacy to the estate plan and protection against incapacity.

122. Utilize life insurance properly. Whether it is to pay estate taxes, protect the family of a deceased “breadwinner” or fund ongoing business structures, there are many reasons why taxpayers should obtain life insurance. Typically there are two different types of life insurance policies taxpayers may select: term life insurance, which provides coverage over a specific period of time (the most popular option being “premium level”), or permanent life insurance, which provides coverage until the taxpayer dies or cancels the policy. A few examples of permanent life insurance include whole, universal and variable.

While life insurance may not be for everyone, it is worth looking into to see if your situation would benefit from it. For instance, business owners may want to guarantee they will be able to continue functioning after the loss of an important employee, or ensure survivor income for the deceased’s family. In addition, the business may want to provide inheritance for family members who are not directly involved with the business. In terms of estate taxes, high-net-worth individuals may still be plagued with a financial burden after the death of a taxpayer. Those electing to use insurance proceeds in order to provide cash for the estate tax payment may soften the blow of having to resort to using other tactics, such as liquidating assets.

A taxpayer may also choose to establish an irrevocable life insurance trust (ILIT), whereby the policy is considered an asset of the trust and ownership is effectively transferred to another person. Then, upon death, the benefits are not included in the decedent’s estate. While there is currently no yearly limit to the amount of exclusion gifts that can be made to these trusts, Senator Bernie Sanders recently proposed that a limitation on such transfers be made in the amount of $30,000. While not currently included in the House bill, it is possible that the senator’s proposal could later be incorporated into any joint House/Senate package. Thus, those who have existing ILITs whose premiums exceed that amount should consider pre-funding those into the trust while still completely tax-free.

When deciding who should fund the life insurance premiums, keep in mind if a business owner is funding the premiums, there could be various related income tax issues. In addition, gift tax issues could arise if a life insurance trust is already set in place. For those reasons, it is imperative that taxpayers consult with a trusted tax adviser in order to determine what structure would work best for their specific situation.

Potential Legislation Alert—Under prior versions of the Build Back Better Act, a new IRC section would have been added (Section 2901) that would include into the grantor’s estate the portion of the trust of which the grantor is the deemed owner for income tax purposes. While previous contributions to existing grantor trusts were to be grandfathered in and would fall outside of these new provisions, any new contributions to such trusts would cause a portion of the trust to be subject to these rules. Existing life insurance trusts, which are generally treated as grantor trusts, would have been adversely affected.

123. Minimize the income taxes applicable to estates and trusts. The tax rates that apply to estates and trusts continue to be significantly compressed. Estate and trust taxable income (exclusive of long‑term capital gain and qualified dividend income) of more than $13,050 for 2021 is taxed at a marginal tax rate of 37 percent. Consequently, it may be beneficial to distribute income from the estate or trust to the beneficiary for the purpose of shifting the income to a lower tax rate. Additionally, trusts and estates can minimize income taxes by employing many of the tax planning strategies that are applicable to individuals, including the “bunching” of deductions and deferral of income strategies noted above.

2021 Tax Rates Applicable to Estates and Trusts

Taxable income

Tax rate

$0 - $2,650


$2,651 - $9,550


$9,551 - $13,050


Over $13,050



Potential Legislation Alert—The current draft of the Build Back Better Act gained a lot of attention for its 5 percent and 3 percent additional surtaxes on incomes over $10 million and $25 million, respectively. Due to the amounts of these thresholds, the surtax is likely to impact few individuals. However, the surtax is imposed on trusts or estates with far smaller incomes, with the 5 percent rate being imposed on trusts and estates with over $200,000 of income and the additional 3 percent effective on income over $500,000. As the legislation moves through the Senate, this is an area to watch.

124. Consider an election under the 65-day rule. Considering the compressed brackets with exceptionally high tax rates on income held within the estate or trust, it is feasible in many scenarios to lessen the total income tax hit for the trust by distributing income to be taxed at the beneficiary level, in lieu of the entity level.

With an election under Section 663(b), complex trust and estate distributions made within the first 65 days of 2022 may be treated as paid and deductible by the trust or estate in 2021. The election of the 65-day rule is an invaluable tactic, giving the trustee the opportunity to distribute income after the end of the year, once the total taxable income of the trust can be more accurately determined.

125. Consider private placement life insurance as a hedge fund alternative. Investors with significant income and wealth should consider private placement life insurance (PPLI). This is an unregistered security that typically utilizes strategies associated with alternative investment funds, however such funds are generally subject to high tax rates as many investments are made on shorter time horizons. A PPLI can help reduce the tax cost associated with investment in these funds, as assets can grow in the life insurance policy tax-free. PPLIs may be a particularly attractive alternative for those in states with higher taxes, like New York and California. PPLIs typically require funding of $3 million to $5 million in premiums per year.

126. U.S. citizen residents of a foreign country should consider the foreign earned income exclusion. U.S. citizens who spend the entire tax year as a resident of another country can exclude up to $108,700 ($112,000 in 2022) of income and some additional housing costs by using the foreign earned income exclusion. Employees and the self-employed can potentially take advantage of this approach. There are several strategies to avoid double taxation for citizens with foreign income, and this approach is ideal for many of those at an income near the exclusion maximum. Your tax adviser can help you determine if you qualify and if this is the best personalized strategy to utilize.

127. Review your foreign bank account balance during 2021 for FBAR preparation. If you have financial interest or signature authority over foreign financial accounts with aggregate balances over $10,000 anytime during 2021, you are required to file FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Failure to report these accounts can result in penalties of $129,210 or 50 percent of the account value, whichever is greater. While the reporting of virtual currency is not currently required, the Treasury Department has signaled its intention to amend the disclosure requirements of virtual currency accounts held overseas.

128. Review Schedules K-2 and K-3 for businesses with international operations. New for 2021, Schedule K-2 is an extension of Schedule K that is used by businesses to report entity level items of international tax relevance from the operation of a partnership or S corporation. Schedule K-3 is like an extension of Schedule K-1 that shows the partner’s or shareholder’s shares of items reported on Schedule K-2. In June 2021, the IRS issued a draft of Schedules K-2 and K-3. These forms were designed to create more clarity for shareholders and partners on how to calculate their U.S. income tax liability in relation to international deductions, credits and miscellaneous items.

129. Be aware of recent regulations issued for international tax. Those with foreign income or holdings should be aware of Section 250, related to foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), which relaxed certain FDII documentation requirements and expanded the pool of taxpayers eligible for FDII deductions. As always, there are significant changes being considered under current tax proposals, such as the potential lowering of the Section 250 deduction percentage from 50 percent to 37.5 percent and the lowering of FDII rates from 37.5 percent to 21.875 percent. Most notably, IRC Section 960(d) would lower the 20 percent rate to 5 percent. In this ever-changing international environment, it is important to consult with knowledgeable and skilled advisers to help you navigate the landscape.

130. Avoid unintentional foreign trusts. Generally, trusts are considered domestic trusts for tax purposes if a U.S. court has primary jurisdiction over its administration and one or more U.S. persons have the authority to control all its substantial decisions. Thus, one needs to carefully consider not only where the trust is formed, but also who will control it. A nonresident alien successor trustee, or even a U.S. citizen in the case of assets subject to foreign court jurisdiction, could cause a U.S. trust to become a foreign trust when the original trustee dies or relinquishes their appointment. Along with such reclassification would come substantial changes to U.S. and foreign reporting requirements, as well as having potential state-level implications.

131. Reevaluate transfer pricing policies in light of supply chain issues. As we predicted last year, due to the global pandemic, many multinationals have faced severe disruptions to their global supply chains, resulting in new suppliers, temporary options, alternative means of performance and the restructuring of supply contracts. Taxpayers may wish to restructure or reprice interest rates in order to maximize available cash flow or defer certain inter-company payments, as well as increase their competitive position when operating in international jurisdictions.

With new tax legislation in play as well as significant tax legislation potentially looming on the horizon, 2021 is a unique tax planning year-end, to say the least. While the picture presently remains murky as to whether additional tax legislation will pass, what provisions will be included and when it will become effective, current law is crystal clear. As we have mentioned repeatedly throughout this guide, the best strategy for an uncertain year-end is to evaluate your individual scenario, develop plans should legislation pass and contingency plans should legislation stall. Many of the 2021 tax savings opportunities will disappear after December 31, 2021, so there is a very short window in which to execute strategies that can both improve your 2021 tax situation and establish future tax savings. In light of the pending legislation, the key this year is to be nimble and flexible. By investing a little time in tax planning before year-end, you can develop plans to fit each potential scenario. Without action, you may only discover tax saving opportunities when your tax return is being prepared—at which time it may be too late.

If you would like to discuss the strategies and concepts indicated herein or have other concerns or needs, please do not hesitate to contact John I. Frederick, Michael A. Gillen, Steven M. Packer or the Tax Accounting Group practitioner with whom you are in regular contact, as well as trust and estate attorneys David S. Kovsky and Erin E. McQuiggan of the firm’s Private Client Services Practice Group. For information on other pertinent topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.