A Critical Time of Year for Tax Planning

By Dean Barber

November 4, 2021

A Critical Time of Year for Tax Planning

Key Points – A Critical Time of Year for Tax Planning

  • Why Tax Planning Is Critical Right Now
  • Tax Planning for 2021 and Beyond
  • The Paths of Tax Law Proposals
  • Accounting for Crypto on Your Tax Returns
  • The Step-Up In Basis Is Staying Put
  • An Update on That Crazy Stock Market
  • 19 minutes to read | 29 minutes to listen

The holiday season isn’t the only thing to be preparing for right now. Dean Barber, Bud Kasper, and JoAnn Huber share why this is a critical time of the year for tax planning.

Podcast: Preparing for Tax Law Changes by Having a Tax Plan with JoAnn Huber

Article: The Latest on New Tax Laws in 2021

Download: Tax Reduction Strategies Guide

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Register for the Modern Wealth Management Educational Series

Complimentary Consultation

Why Now Is A Critical Time for Tax Planning

Dean Barber: Thanks so much for joining us here on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. Do you know what time of year it is?

Bud Kasper: Football season.

Dean Barber: Well, you got that.

Bud Kasper: Thanksgiving.

Dean Barber: We’re getting ready for Thanksgiving, Christmas, the holidays, and all that. But from where we sit, it’s a critical time of year for planning. I’m not talking about financial planning, but tax planning. This is the time of year where we want to buckle down and look at the following for next year.

  • The tax code.
  • The person’s income stream.
  • Their savings capabilities.
  • Their charitable intentions.
  • All the things that are going on in their life that are going to ultimately wind up on their tax return.

With that in mind, we know that some of the biggest impacts that we can make as financial planners working alongside our CPAs is crafting that tax plan for the following year. However, it begins before that. It begins with the creation of a comprehensive financial plan using our Guided Retirement System to create a forward-looking, multi-year tax strategy. Why can’t we create this multi-year tax strategy one time and then implement what we need to annually?

Bud Kasper: You can endeavor to do it, but it’s like hitting a baseball. The ball is moving all over the place. You’re trying to hit it and you might not be able to.

Dean Barber: And guess what? We have a bunch of yo-yos out there in Washington that keep changing the tax code. They always say they’re going to simplify the tax code and get you to pay your fair share, but just make it more complex.

The Complexity and Uncertainty of the Tax Code

When we look at the complexity of the tax code today and the uncertainty of what the tax code will look like next year because of the uncertainty with the spending and tax packages that the Biden Administration has in front of Congress right now, we don’t know what next year’s going to look like. We have a lot more questions than answers at this point.

JoAnn Huber, CFP®, CPA + Tax Specialist leads our tax department and is a wealth of knowledge. She is very good at creating that long-term, forward-looking tax strategy. Once somebody has a financial plan created, JoAnn and her team can look at it, not from an investment perspective, but how future savings can be structured to allow everyone to pay as little tax as possible. That’s not just for an individual year, but over their lifetime.

The Differences Between a Tax Return and a Tax Plan

Bud Kasper: As a CFP® Professional myself, when I go back and I think about what we were taught to do with comprehensive financial planning, we never initially had a complete understanding of tax planning being one of the most significant strategies. I think people get confused because they think that a tax return is a tax plan. Nothing could be further from the truth.

Dean Barber: Right. That’s tax compliance. That’s simply putting the information into the tax preparation software. Very few people do it by hand anymore. I’ve seen a few here and there, but most of it is done through a software package. Most of the software packages are intuitive, but there’s a huge difference between tax compliance and tax planning.

Bud Kasper: I’ve learned more about tax planning as my career has evolved. I’m seeing how significant it is to the outcome that people are trying to achieve. There needs to do be time set aside to apply some of these concepts so that they can have the retirement they always dreamed of. Now is a critical time of the year for tax planning.

How Tax Planning Can Lead to Tax Savings

Dean Barber: Let me give an example. When the latest tax change came in, the standard deductions went way up, and personal exemptions basically went away, it prevented a lot of people from itemizing. This week, JoAnn and I sat down with one of my clients to do that year-end tax planning to plan for next year. We created a donor-advised fund for charitable giving. They’ve been given about $8,000 a year, so they’re not hugely charitable people, but that’s a decent amount of money.

They had some nice gains in their trust account this year. We sold off some things, so those capital gains were realized. So, we create this donor-advised fund, which essentially gifts a lump sum to a deductible charity. You can then dole that money out over whatever period you want. We did $32,000 and did four additional years’ worth of gifting. What that did was create a little more than $7,000 of tax savings for just this year.

So, why did we not do it next year? Because we know we’re unlikely to have the same capital gains that we’re going to have this year. We wanted to take advantage of the bunching capabilities to make that happen.

Bud Kasper: Right. Except for one thing—can taxes be retroactive?

Dean Barber: They may be able to be.

Bud Kasper: They have been in the past. They could be in the future.

A Wealth of Tax Planning Education

Dean Barber: Make sure to check out our updated Tax Reduction Strategies Guide. I also encourage you to listen to Episode 52 of The Guided Retirement Show™. It’s titled, Preparing for Tax Law Changes by Having a Tax Plan with JoAnn Huber. There’s also an upcoming event, Year-end Tax Planning for 2021, in the Modern Wealth Management Educational Series that you can sign up for. What’s more, we’re also going to be doing a year-end tax planning webinar to have you covered during this critical time of the year for tax planning.

Tax Planning for 2021 and Beyond

This very is a critical time for people to be doing their tax planning—not just end-of-year planning for this year, but more importantly looking forward into next year and beyond. Take some time to make decisions about what you’re going to do to help reduce your 2021 tax bill and future tax bills.

JoAnn must be swimming in information right now. It amazes me how many changes there have been to the tax code just in the last decade.

JoAnn Huber: It’s constantly changing. The thing that’s making it very difficult this year is that it seems like every time you read a different article, there’s a different tax law change that’s being proposed by Congress.

Doing Nothing Is the Worst Tax Planning Strategy

Dean Barber: Right. There are a lot of proposals floating around and it’s creating a lot of uncertainty. One thing that I think it’s doing that’s detrimental to many people is making them freeze and do nothing because they don’t know what’s going to happen. That’s probably the worst thing that can happen.

JoAnn Huber: It is. That’s what we’ve been talking about with our clients. We’ve been telling them that the changes aren’t going to directly impact most people this year. We know that we want to do something now. Instead of waiting, let’s act because we know we have the tax laws as they are currently until 2026 at the latest. Maybe something will happen, but if not, we still need to be planning. It’s important to do sound financial planning every year.

The Curveball of Retroactive Taxes

Bud Kasper: There is one thing, though. I was reading about retroactive taxes. They can step back and reengage a tax. What do you need to do with your return if that comes on after the fact? That could very easily happen.

JoAnn Huber: We had to file some mandatory returns because of the retroactive change they made last year dealing with the unemployment income. And you’re right, they can go retroactive. At this point, who knows what’s going to happen.

Most of the things I’m hearing are that they don’t think that it’s going to be retroactive to January 1. There’s some talk about the capital gains, but the Rules Committee came out earlier this week and got rid of the capital gains tax increase. Who knows what’s really going to happen.

Bud Kasper: I know under the tax act, they were talking about having a 39% capital gains rate for those with more than $1 million in income. They could retroactively go back and rip that out of the person’s bank account.

JoAnn Huber: Right. They changed it down to 25% retroactive to September 13.

Bud Kasper: That makes it difficult to plan, doesn’t it?

Is This a Good Time to Capture Capital Gains?

JoAnn Huber: In the last one that came out, there was no tax rate increase to the capital gains. So, where are we going to land? We don’t know, but most of those are for people with higher income. It’s not going to impact the millionaire next door.

We need to see if it makes sense to recognize some capital gains this year because the portfolios have done very well. Do we want to capture some of that gain? I think that’s an investment decision. Do we want to make sure the portfolio is in the balance that we want?

Dean Barber: It’s one of those things where we have a moving target right now. If you don’t have a sound financial plan put together right now, it’s going to be difficult to get any kind of good, forward-looking tax plan done.

A Strong Financial Plan Includes a Tax Planning Component

I want JoAnn to talk about why it’s important to have sound financial planning and tax planning. The tax planning is a component of a real financial plan. If you look across our industry and the people that are CERTIFIED FINANCIAL PLANNER™ professionals, very few will sit right next to the CPA and craft that plan with the taxes in mind. Why is it critical that the financial plan is done first?

JoAnn Huber: You need to know what you’re dealing with. What assets are available? How do the assets need to be spent? What’s the cash flow need of the individual? Then, we can determine how to do that in the most tax efficient manner.

Somebody could be in a very low tax bracket now, which might not be a great thing. Once Required Minimum Distributions started at age 72, they might be going up to the 24% and 32% tax bracket and ended up wasting those years at the lower tax brackets. If we don’t know what the future holds, we don’t know what we need to be doing today.

How Do Roth Conversions Factor In?

Bud Kasper: Right. Roth conversions have never been more important when there’s an unknown tax event in our future. The question is going to be, how much can we do? The answer depends on how much income we have and all the other elements.

JoAnn Huber: It’s harder this year for the taxpayers who have children. Do they want to be doing Roth conversions because of the extra child tax credit? We need to be watching their adjusted gross income. For older people, if their income was too high to get the economic income payment, do we want to keep it lower so they can get that when they file their tax returns?

There are a lot of different things that we’re looking at with income. We’re assessing where we are at today, what we need to do, if we need to accelerate income or deductions, and if we should postpone income to determine best long-term outcomes for individuals.

Don’t Be Ashamed About Needing Some Tax Code Translation

Dean Barber: If some of the things that JoAnn’s talking about sound foreign to you, don’t despair. We have a lot of great educational information for you regarding tax planning. That includes an article, The Latest on New Tax Laws in 2021, that features input from JoAnn and Jason Newcomer, CFP®, AIF®, EA.

A lot of people think that this isn’t a busy time of year for CPAs, which in some cases is true. However, the CPAs that are doing forward-looking tax planning, this is a critical time of year. For the CPAs in that, there isn’t a surprise when the tax return is filed next spring. That’s because they’re sitting down with clients during this critical time to do tax planning.

A Few Perks of Tax Planning

JoAnn Huber: That’s what we’re working on. We’re swamped trying to do this, but it’s important that we have communication with the client to see what they want to do. For example, we had a client that we met with this week that wants to go on a vacation. We determined that it’s going to be sometime in May or June.

However, we decided it was better to take the money out this year to keep their Medicare premiums lower next year. They’re already in a higher bracket. We did some planning thanks to that conversation. If they had waited until January to try to plan the vacation, it would be too late.

Dean Barber: What was the additional Medicare premium going to be if they waited until next year to take that out?

JoAnn Huber: For the couple, it would be about $1,700 for the year or higher.

Dean Barber: If they wouldn’t have had that conversation, had the financial plan already in place, and done the year-end tax planning, that person would’ve paid an additional $1,700 to take that vacation just because of the year that they took the money out of the IRA.

Tax Planning Isn’t a One-and-Done Thing

JoAnn Huber: Right. When we’re talking about tax planning, there are some simple and complicated things. We just need to look at those, but there needs to be multi-year planning. If we’re not doing that, we’re not doing it right.

Bud Kasper: And I think people miss that. This is not a one and done. This is continual.

Dean Barber: It’s ongoing. It should be done every year. During the second half of the year, we’re doing tax intensive reviews. We’re looking toward the end of the year and next several years so that we can marry that financial plan along with the tax plan.

The Paths of Tax Law Proposals

It’s been interesting to see all the different proposals. When look back on when Biden took office, think about how quickly this $3.5 trillion spending, social tax package—whatever you want to call it—came about.

Suddenly, we’ve got thousands of pages of proposals. It makes me think that all these proposals have been in waiting. Now there’s an opportunity and they just got piled altogether to try and get them passed as one giant package. Is that what you think is going on?

JoAnn Huber: I think there’s been a lot of throwing stuff just to see if anything sticks. The thing you need to look at with all the proposals, even if things don’t pass this year, is that they give us an indication of where they’re leaning and what they’re thinking.

If you watch tax law over time, those things eventually come into play. At first, people are appalled by it. Then, they kind of accept and it gets passed. I think that’s where we need to watch and say, “What are they thinking?” and “Where are we going to be in the future?” Even if it doesn’t pass this year, it doesn’t mean that it won’t four or five years from now.

Dean Barber: It’s surprising to me how difficult of a time the Democrats have had despite controlling all three branches of government. Nobody knows everything that is in these packages. That’s troublesome to me that they want to pass stuff that isn’t clearly visible.

A Peak into Past Tax Code Legislation

Bud Kasper: The danger associated with that is something I mentioned earlier—that is the ability to pass a law that is retroactive. You’re stuck. Now it’s passed; now it’s going to be retroactive.

I did little research on that because I wanted to know when it really started. It was in 1969 with Richard Nixon. Nineteen retroactive tax concepts were applied at that time. There hasn’t been an administration that hasn’t considered those at one time or another.

It scares me a little bit from that perspective because you think you’ve just slid home and you’re safe. However, you’re going to find out that you were called out on third base because we can retroactively do that.

Accounting for Crypto on Your Tax Returns

Dean Barber: I noticed that there was a professional athlete who has decided to take half of his income in cryptocurrency.

JoAnn Huber: Great.

Bud Kasper: That’s a true statement.

Dean Barber: If you begin to understand the blockchain technology and what cryptocurrency can do, you look at this new metaverse that is being talked about. It’s basically a personal immersion into the internet through artificial intelligence, virtual reality. Bitcoin and blockchain technology will be an integral part of that.

If you look at crypto and the amount of millionaires that crypto has created over the last seven or eight years, we must ask the question, “What does this crypto mean when it comes to filing a tax return? How do you plan around that?”

Crypto Isn’t Invisible to the IRS

JoAnn Huber: Everybody has to realize when they file their tax return that there is a question on page one that asks if you have crypto.

Bud Kasper: I didn’t know that.

JoAnn Huber: You must report if you do or don’t.

Dean Barber: Does the vaccine prevent crypto?

JoAnn Huber: You guys are so funny.

Bud Kasper: CPAs have no sense of humor, Dean.

Dean Barber: We’ve been working on her for years.

Bud Kasper: I know. She still doesn’t get tickled at anything I say.

JoAnn Huber: The danger with that question is if somebody marks that incorrectly, they’ve willingly lied to the IRS. If they do get caught, the penalties are a lot harsher. There’s a lot in the legislation talking about the tax gap and how to increase enforcement. That’s going to be an area they’re really focusing on. They already are. They’ve done John Doe summons and are going to keep going after people for failing to report. It is a taxable transaction when you sell the crypto or have different things like the athlete. That’s taxable income to him.

Dean Barber: For sure, it’s taxable income. But what happens when he sells the crypto? Is his basis what he received it at?

JoAnn Huber: It’s what he paid the tax on.

Breaking Down the Basics of Crypto

Dean Barber: For those of you that don’t own crypto, you own crypto through a digital wallet. The digital wallet is an app on your phone, computer, or something like that you can make the crypto transactions on. Money will flow from your bank account to the digital wallet to buy the crypto.

When you want to sell the crypto, it turns to cash and goes back into your bank account to spend. Those transactions when the buying and selling happens, that’s where JoAnn says you’re either going to have a gain or a loss. It’s just like you would if you were buying a stock, mutual fund, or something like that.

The interesting thing is that I don’t think most people understand is that those digital wallets report those transactions to the IRS. I don’t know exactly if it’s a 1099 where those are reported, but it’s like that.

If you say on your tax return that you don’t have crypto, but you do, the IRS is going to have the information that you did trade crypto and that you had a gain or a loss. So, why would people lie about it then?

There’s No Hiding When It Comes to Reporting Crypto on Tax Plans

JoAnn Huber: They think because it’s on the hidden dark web, the metaverse, that nobody knows about it and that they don’t have to report it. It’s the same thing that happened with the foreign bank accounts. People thought they didn’t have to report it since it’s foreign and hidden. The IRS went after that and now they’re going after the crypto.

Bud Kasper: Look at it this way as well. Elon Musk said that they would accept crypto for purchases of a Tesla. Now you’ve got the recording from the sale of the car and they will have basis associated with that.

JoAnn Huber: There are a lot of things that are happening with crypto that people need to be aware of. It’s great if you want to own it, but make sure you’re reporting things correctly on your tax return and don’t try to hide it.

Bud Kasper: Now you can buy it in an ETF format.

The Importance of Tax Planning: 10 out of 10

Dean Barber: You certainly can. It’s cleaner and easier, but it’s not direct. It’s not the same thing.

All right, off of crypto. JoAnn, on a scale of one to 10—one being the least important, 10 being the most important—how critical is it for people that want to reduce their tax liability over their lifetime to have a well-structured, multi-year, forward-looking tax plan?

JoAnn Huber: I’d give it a 10.

Bud Kasper: Me too.

JoAnn Huber: There’s no way to do it without having a plan.

Bud Kasper: And so many people don’t.

Dean Barber: Think about this. JoAnn told me earlier that she was needing to have some difficult conversations. We’ve had a lot of clients who have made a lot of money, and they’re going to owe a lot of taxes because of the gains that we’re realized this year. Sometimes people don’t want to hear that.

My point would be this. If you’re making money, it’s OK to pay taxes on it. It’s a good thing. It’s like saying I’d rather make a $30,000 a year income as opposed to a $300,000 a year income because I won’t have to pay as much tax. If we live in the United States and have money or make money, we’re going to pay taxes.

The Step-Up in Basis Is Staying Put

There was a proposal in the original part of the $3.5 trillion spending package that was going to cost zero. Thank God it’s gone now, but who does the math for these people?

Bud Kasper: I have no idea.

Dean Barber: Obviously not very smart people. Although it’s gone now, we know that it’s something that there is an appetite for some of the people in Congress to get passed. What I’m talking about is the elimination of the step-up in basis.

To me, that would be disastrous for average Americans, farmers, and small business owners. Imagine that you are the beneficiary or the inheritor of an asset. Let’s say that asset is a family farm that’s valued at $2 million.

Bud Kasper: Let’s say it’s three generations.

Dean Barber: What was the original cost of that family farm that is now worth $2 million? Maybe the original cost was $200,000, so you have $1.8 million of embedded gain in that farm. Under the current tax law, your cost basis is going to be whatever the value of it was on the date of death of who you inherited the farm from.

Suddenly, you now have a farm that’s worth $2 million and your cost basis is worth $2 million. If you decide that you want to sell the family farm, there’s no capital gain tax due because your cost basis is equal to the value of the farm that sold. Under the proposal that was in this original package, they would have eliminated that step-up in basis. The full gain of $1.8 million would be subject to a capital gains tax, even if you didn’t sell the farm. Therefore, that transaction, that death, causes the inheritance of that appreciated asset to be taxed, even if it wasn’t sold.

Why the Elimination of the Step-Up in Basis Would Be Disastrous

Bud Kasper: The word for that is bankruptcy because they don’t have the cash on hand. A lot of farms are profitable and a lot of them aren’t. If you had to go in and pay that tax, it would totally wipe that out. That’s true of small businesses as well. It’s a ridiculous thing. It’s one of the things that can produce ongoing wealth in an enterprise, whether farm or otherwise. The elimination of the step-up in basis would be disastrous. I can’t imagine somebody would bring that up as being real.

Dean Barber: If you think about what the objective of that is, it’s the redistribution of wealth.

Bud Kasper: Yeah. But in my example, how many farms out there aren’t making a lot of money to begin with? All you’ve done is destroyed a family for the alleged good of the bigger picture.

Dean Barber: But it would even go down to homes, vacation homes, and things like that.

Bud Kasper: It’s just absurd. Why do people come up with this?

An Update on That Crazy Stock Market

Dean Barber: It’s not going to happen now. It’s off the table, which is a good thing. I want to switch gears and talk about this crazy stock market. Ever since we came out of the lows back in late March 2020, the markets have been on what’s seemingly an unstoppable tear. I don’t think we’ve had a single month where we’ve had a greater negative return than -5% since April 2020.

I think the questions on a lot of people’s minds are, “Is this something that’s sustainable? Are we truly that overvalued? What’s the end game here and what’s this thing with inflation?” We could talk about market valuations and inflations for a while.

Bud Kasper: Look back to September and think about having 6% more that would come back to the S&P 500. We’re two thirds there.We’re looking at 4% that we’ve had just in the last 40 days or so.

Dean Barber: Essentially what we did was make up all September’s losses and a little bit more.

Bud Kasper: So where do we go from here? I wish I knew.

Sticking to the Thought of Inflation Being Transitory

Dean Barber: Look at the blockbuster earnings that a lot of these companies are having. They’re doing extremely well, which is giving some validity to the stock prices. You still have ultra-low interest rates. People are talking about inflation. We see it and feel it. It’s at the pump and grocery store. Virtually everything we do is more expensive today, yet you’re not seeing a tightening policy by the Federal Reserve in any meaningful manner to slow this down.

They’re sticking to this idea that inflation is transitory. The only way we’re going to know that is to go into the future. I think it is transitory because we still don’t have money velocity where it needs to be for inflation to remain at a higher level on a sustained basis.

Bud Kasper: Right. When Dean says transitory, he means for a short timeframe. I would’ve told you that by the time we got to the end of the year that the Federal Reserve would already be raising rates.

Dean Barber: That’s not going to happen.

Bud Kasper: I don’t think so now, but I thought we’d have tapering. That means that the interest rates would be allowed to float back up again, but I don’t think we can afford it from an economic perspective. Therefore, if that happens, it’ll be in the next year.

A Sustained Slowing Growth Phase

Dean Barber: It will be in the next year. The markets are already looking for two to three rate hikes next year. That seems overly aggressive. I don’t think we’ll see that much. I believe that when we get on the other side of this COVID deal, you’re going to see things get back to a more normal state. We’ll get the supply chains worked out. I think we’re going to get back to a 2% to 2.5% GDP.

We do see sustained growth in the economy through the next couple of years, 2022, 2023, but that sustained growth is in a slowing growth phase. We’re not going to grow at the same pace that we have been over the last 18 months.

Bud Kasper: Yeah. But you just gave a rationale as to why the market has the ability of still making money next year.

The Great Unknown

Dean Barber: It does. I don’t think we’re going to be anywhere near what we’ve had this year. We won’t be near what we had last year. The good news is that the valuations can be supported based on the economic growth. The thing that could throw cold water on this and cause the markets to reverse cycle is some new spending package or new tax package. That would cripple the consumer and therefore cripple the economy. That’s the unknown.

Bud Kasper: It’s also unknown as to why we have so many people that aren’t seeking jobs.

Back to Work

Dean Barber: They’re starting to. Just this week, 586,000 new private payrolls were added, so that’s good. We’re starting to see people coming off federal unemployment. They’re going back to work because there’s no more free money.

Bud Kasper: That’s what’s going to need to happen just to get this thing back on the right course again with that. We’ll find out what’s going to happen with that, but we don’t have people that are coming into their offices to work. I guess it’s OK if you have a job and you’re doing your job from home. What we’re saying is we don’t have enough people in the workforce that should be working.

Dean Barber: There’s no question about that. This is an anomaly. We haven’t seen this in my lifetime.

Bud Kasper: It’s almost anti-American. I can’t imagine that people could possibly say, “I’m not going to work. I’m still going to get money from the government.” That’s not going to be enough to sustain you into the future.

Dean Barber: It worked for Greece. Just kidding. Bud, JoAnn, and I have tried to have some fun here today, but the reality is financial planning and tax planning is critical. We appreciate you being with us here on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. Stay healthy and stay safe. We’ll be back with you next week.

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