My last column touched on the importance of year-end tax planning for businesses. Like businesses, individuals can also benefit from moves that may help lower their tax bills, not only this year but possibly next.

This year’s planning is more challenging than usual due to the uncertainty surrounding pending legislation that could, among other things, increase top rates on both ordinary income and capital gain starting next year. Whatever Congress decides to do, the time-tested approach of deferring income and accelerating deductions to minimize taxes will still work for most taxpayers, as will the bunching of expenses into this year or next to avoid restrictions and maximize deductions.

But word of warning, if proposed tax increases do pass, the highest income taxpayers may find that the opposite strategies produce better results, i.e., pulling income into 2021 to be taxed at currently lower rates, and deferring deductible expenses until 2022, when they can be taken to offset what would be higher-taxed income. This will require careful analysis to determine the right course.

Due to space limitations, this will be a two-part series. Today we tackle primarily income related planning tips. Next time, we’ll look at ideas related mostly to deductions.

With that said, let’s look at some tips and information that could save you tax dollars if acted upon before year-end. Not all will apply to you, but you or someone in your family likely will benefit from some of them.

Higher-income individuals must be wary of the 3.8 percent surtax on certain unearned income. The “net investment income tax”, or NIIT, is 3.8 percent of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

As year-end nears, the approach taken to minimize or eliminate the 3.8 percent surtax will depend on the taxpayer’s estimated MAGI and NII for the year. Some should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.

Note that pending legislative changes to the 3.8 percent NIIT proposed to be effective after this tax year would subject high income (e.g., phased-in starting at $500,000 on a joint return; $400,000 for most others) S shareholders, limited partners, and LLC members to the NIIT on their pass-through income and gain that is not subject to payroll tax. Accelerating some of this type of income into 2021 could help avoid NIIT on it under the potential 2022 rules, but would also increase 2021 MAGI, potentially exposing other 2021 investment income to the tax.

The 0.9 percent additional Medicare tax also may require higher-income earners to take year-end action. It applies to those whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account as well in figuring estimated tax.

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 someone 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.

Long-term capital gain from sales of assets held for over one year is taxed at 0 percent, 15 percent or 20 percent, depending on your taxable income. If you hold long-term appreciated assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0 percent rate.

The 0 percent rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $80,800 for a married couple; estimated to be $83,350 in 2022). If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.

Postpone income until 2022 and accelerate deductions into 2021 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying levels of AGI. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest.

Postponing income also is desirable if you anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may actually pay to accelerate income into 2021. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year. That’s especially a consideration for high income taxpayers who may be subject to higher rates next year under proposed legislation.

If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2021 if eligible to do so. Keep in mind that the conversion will increase your income for 2021, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation.

It may be advantageous to try to arrange with your employer to defer, until early 2022, a bonus that may be coming your way. This might cut your tax, as well as defer it to next year. Again, considerations may be different for the highest income individuals.

That will do it for today. Check back next week for the rest of the story!

Lane Keeter, CPA, is Office Managing Partner of the Heber Springs office of EGP, PLLC, CPAs & Consultants (a full-service financial firm with offices in Heber Springs, North Little Rock and Bryant) and past winner of The Sun-Times Reader’s Choice Award for Best Accountant

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