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ing income may be exempt from the NII tax. Caution: these rules are complex, so obtain pro- fessional assistance.
TIP: When you add the NII tax to your regu- lar tax plus any applicable state income tax, the overall tax rate may approach or even exceed 50%. Factor this into your investment decisions.
Section 1031 Exchanges
Beginning in 2018, the TCJA generally elimi- nated the tax-deferral break for most Section 1031 exchanges of like-kind properties. However, it preserved this tax-saving technique for swaps involving investment or business real estate. Therefore, you can still exchange qualified real- estate properties in 2021 without paying current
or your 2021 tax-return due date, plus extensions. TIP: Proposed legislation would eliminate the tax break for real estate. If this technique appeals
to you, start negotiations that can be completed before the end of the year.
Estate and Gift Taxes
Going back to the turn of the century, Con- gress has gradually increased the federal estate- tax exemption, while establishing a top estate- tax rate of 40%. At one point, the estate tax was repealed — but for 2010 only — while the unified estate- and gift-tax exemption was severed and then subsequently reunified.
Finally, the TCJA doubled the exemption from $5 million to $10 million for 2018 through 2025,
the 2021 Social Security wage base of $142,800 and promptly allocate the payroll-tax savings to a 401(k), you can increase your deferral without any further reduction in your take-home pay.
• Sell real estate on an installment basis. For payments over two years or more, you can defer tax on a portion of the sales price. Also, this may effectively reduce your overall tax liability.
• Weigh the benefits of a Roth IRA conversion, especially if this will be a low-tax year. Although the conversion is subject to current tax, you gen- erally can receive tax-free distributions in retire- ment, unlike taxable distributions from a tradi- tional IRA.
• Consider a qualified charitable distribution (QCD). If you are age 701⁄2 or older, you can trans- fer up to $100,000 of IRA funds directly to a char- ity. Although the contribution is not deductible, the QCD is exempt from tax. This may improve your overall tax picture.
Conclusion
This year-end tax-planning article is based on the prevailing federal tax laws, rules, and regula- tions. Of course, it is subject to change, especially if additional tax legislation is enacted by Con- gress before the end of the year.
Finally, remember that this article is intended to serve only as a general guideline. Your per- sonal circumstances will likely require careful examination. u
Kristina Drzal Houghton, CPA, MST is a partner at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.
“Develop a comprehensive estate plan. Generally, this will involve various techniques, including trusts, that maximize the benefits of the estate- and gift-tax exemption.”
with inflation indexing. The exemption is $11.7 million in 2021.
ACTION: Develop a comprehensive estate plan. Generally, this will involve various tech- niques, including trusts, that maximize the benefits of the estate- and gift-tax exemption.
Furthermore, you can give gifts to fam-
ily members that qualify for the annual gift- tax exclusion. For 2021, there is no gift-tax liability on gifts of up to $15,000 per recipient ($30,000 for a joint gift by a married couple).
tax, except to the extent you receive ‘boot’ (e.g., cash or a reduction in mortgage liability).
ACTION: Make sure you meet the following two timing requirements to qualify for a tax- deferred Section 1031 exchange:
• Identify or actually receive the replacement property within 45 days of transferring legal own- ership of the relinquished property; and
• Have the title to the replacement property transferred to you within the earlier of 180 days
This reduces the size of your taxable estate. TIP: You may ‘double up’ by giving gifts in
both December and January that qualify for the annual gift-tax exclusion for 2021 and 2022, respectively.
Miscellaneous
• Contribute up to $19,500 to a 401(k) in 2021 ($26,000 if you are age 50 or older). If you clear
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