Year End Tax Letter

Dear Clients, Friends, and Beacon Pointe Associates,

End of year tax planning is more difficult this year than it normally is, given that we do not yet know if this year will bring changes to tax laws. As of 11/29/2021, the Build Back Better (BBB) Act has passed the House and is pending approval by the Senate; however, additional changes are expected before the legislation becomes law. We will likely see a few tax increases, but the good news is that the changes may not impact as many as we once thought they might.

Although it is possible changes to tax laws are implemented retroactively, we know making certain tax moves is wise regardless of whether tax laws change. We have summarized key current and proposed policy considerations throughout this letter.

Below are portfolio-related year-end tax planning tips to consider with the guidance of your tax professional and advisor.

Harvest Losses from Your Taxable Accounts Selling securities for a loss (“harvesting” losses) can reduce your tax bill now and in the future. Even if you held the securities for less than a year, losses from the sale of securities can shelter short-term and long-term capital gains realized this year from income tax, and any unused losses can reduce up to $3,000 of ordinary income. You can carry any losses unused this year forward as a means to cut your future tax bills. Note that you cannot deduct a loss on a security when a virtually identical one is purchased within 30 days of the original sale, as this is considered a wash sale. Your Beacon Pointe advisor will be in touch if there are prudent loss opportunities in your portfolio.

Make Annual Exclusion Gifts to Family For those who expect to gift or leave assets to heirs above the exemption amount or want to continue helping family members if you have done so in the past, consider making annual tax-free gifts to loved ones.  The 2021 annual exclusion allows you to make tax-free transfers of $15,000 per recipient in cash or property without reducing your ability to shield future wealth transfers from tax using lifetime exemption. Additionally, these tax-free transfers do not require the filing of a gift tax return. Note that this amount is increasing to $16,000 for 2022. Consider creative ways to give to your children and grandchildren, like funding college or a loved one’s retirement. You might use the annual exclusion gift to fund a tax-advantaged Section 529 college savings plan. Or, if your children or grandchildren are working, your gift of cash might fund a Roth IRA to kick-start their retirement savings, compounding growth over a long period and creating tax-free income in retirement. In 2021, your employed children/grandchildren can use $6,000 of your gift to fund a Roth IRA, reduced by any other contributions to an IRA. To be eligible, your children/grandchildren must have earned at least $6,000 in 2021 and not more than $125,000 (single taxpayer). Gifting shares of stock or other investments can get them interested in learning about investing. If gifting cash, be sure checks are deposited before year-end to count for your 2021 annual exclusion. For other financially creative gifting ideas, read our piece on Financially Savvy Gift Ideas.

Maximize IRA and Retirement Plan Contributions Be sure to fund your retirement account to the applicable limit: the IRA funding limit for 2021 is $6,000 ($7,000 if over age 50), and the elective salary deferral limit to 401(k), 403(b), and 457 plans is $19,500 ($26,000 if over age 50). If you are a business owner, consider contributing to a SEP IRA or establishing and contributing to a Solo 401(k) by year-end. The contribution limit for SEP IRAs and profit-sharing/401(k) plans for business owners is 20% or 25% of compensation (depending on the business entity) up to a maximum of $58,000 for 2021. If you are a high-income taxpayer, deferring income could potentially allow the 20% QBI deduction on business income. The deduction may apply if the deferment of income brings your income below the highest income and capital gains tax rates.

Take Minimum Distributions from Retirement Plans  After reaching age 72, the IRS requires that a minimum amount is distributed from retirement accounts annually. This also applies to certain inherited retirement accounts. It is important to take at least your full RMD amount before year end; the penalty for not distributing the minimum required amount is 50% of the amount required to be distributed but not withdrawn. RMDs are not required for Roth IRAs. The primary factors that determine whether an RMD must be taken from an inherited retirement account, as well as the timing and requirements, are as follows: (1) the date the account holder passed away (2) the beneficiary’s relation to the deceased account owner, and (3) the type of retirement account inherited. We suggest working with your CPA to determine the amount of your IRA and the appropriate amount of income tax to withhold on your RMDs. For more information, read our piece on FAQs About RMDs.

Consider a Qualified Charitable Distribution If you choose to be charitable and are over age 70½, you could donate up to $100,000 from an IRA directly to a qualified public charity (not a private foundation, donor-advised fund, nor supporting organization) to both satisfy your charitable goals and prevent the distribution from being included in your taxable income. Making a direct donation from your IRA might lower your income and allow you to qualify for lower Medicare premiums and other income tax breaks. Note that contributing to an IRA after age 70 ½ reduces the amount transferable to a charity as a QCD. QCD also counts toward your required minimum distribution for the year.

Gift Appreciated Securities or Cash to Charity  If you plan to donate to charity this year, consider making your donation with appreciated stock or mutual funds you have held for more than one year. If you itemize your deductions, not only will you be able to deduct the full fair market value of the securities (limited to 30% of Adjusted Gross Income [“AGI”] with the excess carried forward for 5 years), you will also avoid the capital gains tax you would otherwise pay on the sale of those securities if donated to a public charity. You might also consider donating cash since provisions from last year’s CARES Act were extended and modified for this year to allow: (1) a $600 (married filing jointly) above the line charitable deduction for certain cash charitable contributions; and (2) a deduction of up to 100% of AGI for cash contributions to qualified charities if itemizing. A qualified charitable contribution in this regard is a cash contribution made in 2021 to a qualified public tax-exempt organization, which does not include supporting organizations or donor-advised funds. If you do not think you will itemize every year, it might make sense to bunch several years of charitable donations into one year using a donor-advised fund. (Note that bunching may no longer be necessary if the state and local tax (SALT) deduction limitation is increased from $10,000 to $80,000 as currently proposed by the BBB Act.) A donor-advised fund allows you to take the income tax deduction this year but direct the fund to make donations to your chosen charities over many years. Please let your advisor know if you would like to gift securities from your accounts, as it takes some time to facilitate the transfer. Be sure to obtain a receipt as well as a written acknowledgment from the charity describing the donation and anything you received in exchange for it. For more information, read our piece on Thoughtful Charitable Giving.

Convert Your Traditional IRA to a Roth IRA  One provision that is currently included in the BBB Act’s proposed legislation is the elimination of Roth conversions beginning after 12/31/2031 for taxpayers with income over $400,000 ($450,000 married). If you believe your tax rate might be higher in the future because of either greater expected income or higher tax rates, consider converting your Traditional IRA to a Roth IRA. A Roth IRA is attractive to those expecting higher taxes in the future because, unlike distributions from a Traditional IRA, qualified withdrawals from a Roth IRA are income tax-free. A conversion might also help reduce your taxes over time because reducing the value in your Traditional IRA will reduce future required minimum distributions (RMDs), which might result in a lower tax rate. There is no free lunch, of course, as you will have to pay income tax on the amount you convert. The conversion typically makes sense if one or more of the following apply: (1) you have monies outside of your IRA to pay the income tax on the conversion, (2) you believe you will be in a higher income tax bracket later, (3) you are not planning on using the converted funds for several years to allow for tax-free compounding, or (4) you plan on leaving your IRA or Roth IRA to your heirs.  Note that if you decide to convert to a Roth, you can no longer undo it later (as it used to be), so be sure to check with your tax professional before converting. Note the proposed legislation also eliminates converting post-tax IRA contributions to Roth IRA beginning 1/1/2022. Speak with your CPA about converting your post-tax basis in your IRA or other retirement plan to Roth before the end of the year.

Tracking Cryptocurrency  As more investors explore the world of cryptocurrency, it is necessary to understand the taxation of sales, transfers, and purchases. Currently, the online exchanges that offer cryptocurrencies such as Bitcoin do not report on transactions like other investment brokerage firms do. This puts the responsibility on the taxpayer to track and report all transactions. It is important to track your cost basis of the purchase to help calculate future gains when it is later sold. Know that exchanging one cryptocurrency for another is not a deferred exchange; rather, it is taxable as a sale. Additionally, utilizing cryptocurrencies to purchase goods should also be reported as a sale. If you are an active trader or miner of cryptocurrencies, consider using software that will help track everything to make tax reporting easier. Currently, losses of cryptocurrency are not subject to the wash sale rules, which means you could sell a position to realize a loss, then rebuy it back immediately and still be able to recognize the loss. Be sure to let your CPA know if you have any cryptocurrency holdings so they can help you track and report everything.

Consider Investing in a Qualified Opportunity Zone This is the last year you can defer a large capital gain realized by investing in a qualified opportunity zone (QOZ) fund and still qualify for a 10% basis step up after holding it for five years. QOZ legislation was established by the Tax Cuts and Jobs Act (TCJA) in 2017 and has since been clarified by IRS Regulations. The law allows (1) federal tax deferral of capital gain invested in a QOZ until the earlier of when the fund is sold or December 31, 2026, (2) forgiveness of 10% of the capital gain held in the QOZ for five years, and (3) federal tax avoidance on investment gain on the initial QOZ investment if held for at least 10 years. The capital gain deferred or avoided might still be taxable at the state level and the federal income taxes will be due in 2026. If you have realized significant capital gains in the last six months, speak with your advisor about our approved QOZ fund as the underlying investments matter to take advantage of the tax-free growth and make up for the lack of liquidity. The deadline to reinvest capital gains realized after July 4, 2020 is 180 days after the date the gain was realized. The investment does not have to take place in the same calendar year to qualify for deferral. For pass-through entities like S-corporations, LLCs and beneficiaries of estates and non-grantor trusts, partners/beneficiaries have the option to start the 180 day investment period on any of the following: 1. The date the gain was realized; 2. The last day of the partnership taxable year (December 31 if calendar year-end); or 3. The partnership’s tax filing due date (without extensions) for the taxable year in which the partnership realized the gain (March 15 for calendar year-end). Be sure to confirm deadlines with your CPA.

New Pass-Through Entity Tax  Now 18 states (and several more have current proposals pending) have enacted a pass-through entity (PTE) tax since the TCJA SALT limitation was passed in 2017. The PTE tax allows taxpayers of flow-through entities to opt into paying state income tax on net income from the pass-through entity at the entity level, which then becomes a deduction for federal income tax purposes. For most taxpayers, this will reduce federal income taxes similarly to when state income taxes were fully deductible under the tax law prior to the TCJA. There are a few caveats why it might not make sense to opt in, and every state has different tax rates with their own nuances, so a call with your CPA is required to determine if this makes sense for you. The election must be made, and state income taxes must be paid before 12/31/2021 to benefit from the deduction this year. Note that if the SALT limitation increases next year as currently proposed by the BBB Act, it might not make sense to elect into the PTE tax next year.

Economic Impact and Child Tax Credit Advance Payments  The IRS just announced they will be mailing those who received economic impact payments Letter 6475 in January to determine eligibility to claim the Recovery Rebate Credit. Those that received Child Tax Credit advance payments will receive Letter 6419 from the IRS in January to reconcile the advance payments with the actual credit due. Keep these letters and be sure to provide them to your CPA when you are filing your taxes.

Key Metrics:

2021 Federal Taxable Income Rates

2021 Federal Itemized and Standard Deductions The standard deduction is $12,550 for single filers and $25,100 for joint filers. If your itemized deductions exceed the standard deduction, you will itemize. Key itemized deductions:

  • Up to $10,000 combined for state and local taxes paid (your choice of state income tax, property tax, or sales tax)*;
  • Mortgage interest for home loans up to $750,000; loans taken on or before 12/14/2017 then up to $1,000,000*;
  • Unreimbursed qualified medical expenses in excess of 7.5% of adjusted gross income; and
  • Charitable donations of cash or goods.

*It is important to check with your CPA to understand whether your state has conformed to the 2017 Federal tax law. For example, California and New York have not conformed to the Federal law for itemized deductions. They, therefore, still allow a full deduction for property taxes, miscellaneous itemized deductions including investment advisory fees, and mortgage interest on new loans up to $1,000,000. Investment advisory fees are federally deductible in calculating the 3.8% net investment income tax on investment income.

2021 Federal Lifetime Gift and Estate Tax Exemptions and Rates

Previous Versions of the BBB Act. The BBB Act was revised multiple times before its current version, and since it has not yet passed the Senate, we are expecting additional changes. As we do not yet know what will be in a final bill, here are a few of the provisions that were included in previous versions but are not included in the current proposal. There is a chance these could be added back in some form.

  • Proposed raising the top marginal tax rate to 39.6% from the current 37%.
  • Proposed expanding the taxable income range for which the top rate applies to taxable income above $400,000 so that the top marginal tax rate of 39.6% would apply to taxable income over $400,000. If your taxable income in 2022 is likely to exceed $400,000 and you are planning to convert a portion of your IRA to Roth or taking a distribution from your retirement plans to cover living expenses, you might accelerate those actions into 2021 to lock in this year’s tax rates.
  • Proposed increasing the capital gains tax rate for taxpayers with income over $1,000,000.
  • Proposed cutting the exemption against gift, estate, or Generation-Skipping Tax by up to 50%. If in the next few years you intended to make a substantial gift (likely in excess of $8,000,000 as a single person or $16,000,000 as a couple, depending on prior gifting), you might discuss with your estate attorney accelerating that gift into 2021. Note that the current gift and estate exemption amount is scheduled to revert to $5,000,000 per person after 12/31/2025.

As always, feel free to call us with any questions or concerns. We wish you the best in 2022!

Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professional before making any investment decisions. Past performance is not a guarantee of future results.

© Beacon Pointe Advisors. All Rights Reserved.


You are now leaving the website of Beacon Pointe Advisors and will be entering the website for Institutional Intelligent Portfolios®, an automated investment management service made available to you exclusively through Beacon Pointe Advisors. Beacon Pointe Advisors is independent of and not owned by, affiliated with, or sponsored or supervised by Schwab. Schwab has no responsibility for the content of Beacon Pointe Advisors' website. This link to the Institutional Intelligent Portfolios website should not be considered to be either a recommendation by SPT, Schwab, or any of their affiliates, or a solicitation of any offer to purchase or sell any security.

Privacy Preferences
When you visit our website, it may store information through your browser from specific services, usually in form of cookies. Here you can change your privacy preferences. Please note that blocking some types of cookies may impact your experience on our website and the services we offer.