Tax Increases Look Likely; Here Are Defensive Steps

A big tax increase appears headed your way. In fact, federal lawmakers are eyeing several tax increases.


The tax hikes would pay for jumbo spending bills Congress is considering. Exactly which taxes get boosted won’t be clear until the House and Senate vote. Today’s proposals could change radically.

Will you be exempt from any tax increase if lawmakers stick to President Joe Biden’s pledge of no new taxes on families making less than $400,000 a year? Maybe.

The devil’s in the details, though. Which income will count towards that $400,000 threshold? Will new taxes be created that do not depend on income level?

Tax Increase: How To Handle It

So here are 17 steps you can take to legally dodge or trim possible tax increases. In some cases, your goal might be to reduce your income to below tax thresholds like $400,000 of income, or $1 million under a separate proposal to raise the capital gains tax rate.

Learn the differences among various types of income on your tax return.

Bump Up In Top Individual Income Tax Rate

Problem: A possible return of the top individual income tax rate to 39.6% from today’s 37%.

Tax tips: If that change occurs, effective in 2022, one way to protect yourself is by accelerating income from 2022 into 2021, says Paul Schatz, president, Heritage Capital. “The easiest way to do that is by selling stock or Bitcoin that has appreciated, before year end,” said Tom Wheelwright, CEO of WealthAbility.

Also consider accelerating ordinary income. For payments you normally receive in January, “ask customers and clients to pay you in December,” Wheelwright said.

Another defensive step would be to boost contributions to your 401(k) account, if your plan allows you to, says financial advisor Jason Field, with Van Leeuwen & Company.

Charitable donations are a fourth way to lower income, Field says.

And consider Roth conversions for all or part of your traditional IRA. The conversion amount is taxable. But years later, qualified withdrawals won’t be hit with a higher — or any — income tax rate.

An alternative, sixth approach? Maximize charitable giving next year. The deduction saves you more money in a higher-rate year, says Mallon FitzPatrick, managing director of Robertson Stephens.

Check out the federal individual income tax rates and brackets.

Capital-Gain Tax Increase

Problem: One possible 2022 tax hike would jack up today’s top long-term capital gain tax rate of 20% to between 25% to 30%.

Your rate this year is 0% if your total taxable income is $40,400 or less. Your rate is 15% if your taxable income is $40,400 to $445,850. Above that, today’s 20% rate kicks in.

Tax tips: One step you can take is to realize any gains this year, before a higher rate kicks in, that you’re considering taking in, say, the next year or two.

Second, harvest any capital losses to offset taxable gains. “Check your cryptocurrency holdings and stocks to see which ones you can harvest,” Wheelwright said.

Third, if you don’t need the proceeds now, hold your assets until after the 2024 presidential election. See if the cap-gains tax boost gets reversed by the next administration, Wheelwright says.

Fourth, switch some money into federally tax-exempt municipal bonds or funds, Field says.

Another Threat To Today’s Top Cap-Gain Rate

Problem: A second cap-gains tax increase that lawmakers are considering would boost the tax on long-term capital gains and qualified dividends for people with annual income greater than $1 million. Ordinary income tax rates, which now go as high as 39.6%, would replace the 20% rate.

Tax tips: In addition to the other defensive steps listed above for dealing with cap gains taxes, Robertson Stephens’ FitzPatrick advises gifting highly appreciated securities to heirs who are in a lower tax bracket, rather than selling the securities.

Also, consider funding a tax-exempt charitable remainder trust with appreciated securities. Basically, you get annual income. Whatever remains in the trust at your death goes to your designated charity. Unitrusts (CRUTs) and annuity trusts (CRATs) use slightly different formulas for setting the size of your annual payments.

Third strategy: If you are already arranging the sale of a business or property, consider taking payments in installments. Especially if the total sale price is more than $1 million, installments over three years, for example, would split your proceeds into annual segments smaller than the higher tax $1 million threshold, says Thomas Pontius, wealth advisor at Kayne Anderson Rudnick.

More Ways To Avoid A New Cap-Gain Tax Increase

Fourth: If your income is within $100,000 of $1 million, consider lowering it by making a qualified charitable distribution. That’s a charitable donation of up to $100,000 that goes directly from your traditional IRA to a qualified charity. If you are 70-1/2 or older, it satisfies your required minimum distribution for the year. And it excludes the donation from your taxable income, without your needing to itemize.

Fifth, contribute to a nonqualified deferred compensation (NQDC) plan if you can. Like 401(k) contributions, contributions to a nonqualified plan don’t count as part of your taxable income. But there’s no limit on how much you can contribute to an NQDC. “It’s a good way to keep your income under $1 million without actually giving money away,” Field said.

Smaller Estate Tax Exclusion

Problem: Some lawmakers want an early return of the $5 million estate tax exemption, currently scheduled for 2026, or even slashing the exemption to $3.5 million. This year, the exemption is $11.7 million or twice that for married couples. Gifts that exceed the exemption are subject to federal estate tax as high as 40% this year.

Tax tip: Make gifts to heirs this year. Or move assets like a business into a family limited partnership, which lets you retain control of a business, Wheelwright says.

End Of Step-Up In Basis On Stocks At Your Death

Problem: Currently, your appreciated stocks and other assets get priced at their value at the date of your death. As a result, the capital gain is zero and neither you nor your heirs pays cap-gains tax on unsold assets. Pres. Biden wants certain heirs to pay a tax based on the rise in value from when the assets were bought. The gain would be reduced by a $1 million exemption ($2 million for a married couple), plus a $500,000-per-couple exemption for a primary residence.

Tax tips: Rather than leaving assets to heirs, consider leaving highly appreciated assets to charity or gift them them to loved ones during your lifetime.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform the market.


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