2021 Year-End Tax Planner

WA Capital Gains Tax

We are entering an age where states are becoming increasingly creative in finding ways to enact new taxes. We saw it last year in Oregon with the new Corporate Activity Tax which was a response to the failed efforts of Measure 97 in 2016 to raise a new corporate tax. Washington followed suit in May 2021 with Senate Bill 5096 which enacted a 7% capital gains “excise” tax effective January 1, 2022. The new tax is applicable for capital gains in excess of $250,000, although there are exemptions for real estate transactions and certain small family businesses. The legality of the new tax is currently in the hands of the courts where there are two ongoing lawsuits arguing the tax is an income tax, therefore violating the Washington constitution. We are unlikely to see a resolution in short order, so we are keeping an eye out for further guidance from the Washington Department of Revenue as we approach the beginning of 2022. 

Estate Planning

With all the talk of a possible scaled back federal exemption effective in 2022 many clients have been motivated to make use of their historically high federal exemption. Oregon continues to tax estates once they reach $1M and Washington just under $2.2M. Oregon and Washington don’t track what is given during life so making lifetime gifts helps avoid state estate tax. Additionally, gifting removes future appreciation from the federal estate and with the right planning can make use of the exemption that is scheduled to be cut in half after 2025. Using trusts to hold these lifetime gifts can be a powerful way to both protect assets and provide flexibility if funds are unexpectedly needed by the donor. A simple way to reduce estate tax is making use of the annual exclusion, which for 2022 is increasing to $16,000 per donee. Tax-free gifts can also be made by paying medical and tuition costs for others directly to medical providers and educational institutions.  

International Tax: OECD Two-Pillar Agreement and Potential Changes to US Tax on GILTI

While the international community is closely monitoring the development of the Organization for Economic Cooperation and Development (OECD) two-pillar agreement, which is supposed to address challenges arising from digitalization of the global economy, the US taxpayers with foreign financial holdings are waiting for the final decision on proposed modifications to the US international tax rules. The Global Intangible Low Tax Income (GILTI) regime, which was enacted as part of the 2017 Tax Cuts and Jobs Act, may undergo a significant change resulting in major US tax expenses for US shareholders of Controlled Foreign Corporations. The focus of our international team remains on helping our clients with inbound and outbound investments to stay in compliance and mitigate US taxation under the onerous GILTI regime by utilizing various techniques including an election to tax individual US shareholders of controlled foreign corporations at corporate rates, taking advantage of the entity type elections or modifying entity’s structure to avoid the tax burdens of GILTI. 

State and Local Update

Effective this year Oregon taxpayers, businesses and individuals, residing or deriving income from sources within the Metro and Multnomah County districts will be subject to the two new taxes passed by voters in 2020. Withholdings on wages was optional in 2021 for both the new Metro Supportive Housing Services Income Tax and the Multnomah County Preschool for All Income Tax, but will be mandatory in 2022. For both taxes withholding will be required on employees who work within the jurisdiction boundary and earn $200,000 or more annually. Employees may opt out of withholding if they choose to. Employers located within the Metro boundary should be working with their payroll providers to be ready to withhold starting in January of 2022. 

Charitable Contributions

There is a tax planning opportunity available for donations to charity for 2021. The charitable contribution deduction limitation for individuals is increased from 60% to 100% of Adjusted Gross Income (AGI) for certain donations. In order to qualify, a donation must be a cash contribution to a public charity that is made by the end of 2021. Similar donations made in 2022 will be subject to the 60% of AGI limit. If you are interested in making a large donation, we suggest doing tax planning now to determine the timing that provides a better tax benefit. 

We are monitoring the progression of income tax provisions in the Build Back Better Act. One notable provision that may be enacted would increase the itemized deduction limit for state and local taxes (SALT) from $10,000 to $80,000 beginning in 2021. We will provide additional information when we know more. 

For more year-end tax planning tips, download the full tax planning guide.

Disclaimer: The information contained in this communication, including attachments and enclosures, is not intended to be a complete analysis of all related issues. Nor is it sufficient to avoid tax-related penalties. It has been prepared for informational purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and Perkins & Company, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.