Tax Corner

Tax law changes are coming. In the short term, we need to be aware of the provisions in the Build Back Better Act working its way through congress that will be the most significant tax reform we’ve seen since 1986. Keep in mind that nothing is yet law, and the eventual tax law we’re left with could look vastly different than what’s proposed today. One provision that affected clients should act on in 2021 is the Federal estate and gift tax exemption decreasing from $11.7 million per individual to $5.85 million per individual. For individuals that may have an estate that exceeds $5.85 million for a single person at death or $11.7 million for a couple at death, they should consider making wealth transfers today to use the higher exemption limit. Keep in mind that, to receive benefit, a client would have to use at least $6 million of their exemption.

The second provision clients should consider acting on now is backdoor Roth conversion, or nondeductible IRA contributions that are converted into Roth IRAs. The ability to do a backdoor conversion will likely go away in 2022. Regular conversions and contributions are still allowed, subject to certain high-income taxpayer limits.

Longer-term, we are likely seeing the lowest income tax rates today that we’ll see in our lifetime. The US Federal debt increased from a deficit of just over $5 trillion in 2000 to $28.4 trillion today, and is increasing steadily as we eye a $4.5 trillion dollar agenda in congress. At some point, that debt will need to be repaid, and will be done through higher taxes. Having a higher percentage of savings investing in after-tax vehicles will position taxpayers well in future years.

Your Signature Wealth Management advisors are ready to have conversations around these topics and plan with you for what is coming.