The Advisory


2021 Q4

Alert for Pass-Through Entities

On September 30, 2021, Massachusetts enacted an elective tax on pass-through entities to circumvent the $10,000 cap on federal itemized deductions for state, local and real estate taxes. Electing entities would pay income taxes at the entity level, reducing reported federal (but not state) income and providing a credit for 90% of the allocable amount of taxes paid.

We are evaluating the benefits provided by this legislation and will reach out to clients we think could realize substantial benefits from electing to pay the pass-through entity tax.

Proposed Legislation—The Build Back Better Act

The latest draft of the Build Back Better Act includes a number of provisions that would impact taxes for individuals and businesses alike with a general effective date of January 1, 2022.

Some of the more notable changes for individuals include:

  • Raising the cap on the state and local tax deduction from $10,000 to $80,000 while extending the cap to 2030 (For many taxpayers that switched to taking the standard deduction after the Tax Cuts and Jobs Act, this would likely put them over the threshold to start itemizing deductions once again.)
  • Extending the American Rescue Plan Act Child Tax Credit expansion and permanently making the child tax credit fully refundable
  • Adding an additional 5% surcharge on adjusted gross income less investment interest expense in excess of $10 million and another 3% surcharge on any such income above $25 million.
    Tax credits for energy efficiency home improvements—these have been renewed and extended for over a decade, allowing you to claim up to $1,200 in credits based on 30% of the cost.

For businesses, the most notable change is the expansion of the 3.8% net investment income tax to also apply to business income from pass-through entities (predominantly affecting S-corporations, limited partnerships and real estate professionals).

Learn more about the Build Back Better Act.

Year-End Reminder—Charitable Contributions

It’s not too late to think about donating to charity. All taxpayers can get a benefit from making charitable contributions for 2021:

  • Taxpayers who don’t itemize deductions can deduct up to $300 ($600 if married filing jointly) for charitable contributions paid during 2021.
  • Taxpayers who do itemize deductions can generally deduct up to 60% of their adjusted gross income for charitable contributions paid during 2021, with any excess carrying forward to future tax years.

When considering a charitable donation, keep a few things in mind:

  • If you donate long-term appreciated assets like stocks, real estate or bonds, you can get a deduction based on the appreciated value without having to pay capital gains tax like you would upon a sale.
  • If you are over age 70½, you can have withdrawals of up to $100,000, including required minimum distributions, paid directly to an eligible charitable organization to avoid paying taxes on the distribution.
  • If you annually donate more than the $300 deductible per taxpayer without itemizing but not enough to surpass the standard deduction threshold (when combined with other optimizable deductions), consider stacking all of your contributions in a single year to maximize your benefits. If you are intentionally spreading your gifts over a set interval, consider setting up a donor-advised fund so you can make a one-off, immediately deductible contribution while still retaining discretionary control over the timing, recipients and amounts donated from the fund balance.

We can help you put together a plan to maximize your deductions while meeting your charitable goals.