Year-End Tax Planning Checklist - 2021

With the year 2022 approaching quickly I thought I’d share with you what we are doing on our end and other tactics that can be utilized to mitigate tax liability. Consider reviewing these options with your tax advisor prior to the December 31st deadline.

1. Rebalancing Your Portfolio/Harvest Losses
If this year’s record-setting gains in the stock market have thrown your investment portfolio out of alignment, we are reviewing your asset allocation to decide what might need trimming and what should be beefed up. Getting back to your target allocation may involve selling stocks that have significant gains. We may be able to offset those gains and reduce your tax bill through tax loss harvesting, meaning selling investments that have lost value and using those capital losses to offset capital gains (or, in the absence of gains, up to $3,000 a year in income). It’s also a great time for us to review your most recent tax return's schedule D to analyze gains and losses carried over. If you don’t utilize one of our in house CPA’s, please forward over to myself and team your schedule D.

2. Making Annual Gifts
This year you can gift up to $15,000 per person to any recipient without incurring gift taxes. For example, if you and your spouse each take advantage of the gift tax exclusion, together you can give a total of $30,000 to each child and grandchild without paying gift taxes, while reducing the size of your taxable estate. As long as each gift doesn’t exceed the $15,000 limit, it will not count against your lifetime estate tax exclusion.

3. Making Charitable/Philanthropic Gifts
Charitable giving is always an effective way to support causes that are important to you while reducing your income taxes. However, you may want to take a closer look at your giving strategy this year. If you must sell some highly appreciated securities in your portfolio to correct an imbalance, now may be a good time to consider donating the securities instead (rather than making a cash donation) as you will not pay taxes on the gains if the securities go to a qualified charity.

4. Contributing to a Donor-Advised Fund
If you decide to accelerate your charitable giving, creating and contributing to a Donor-Advised Fund (DAF) for 2021 is another effective strategy. Because a DAF allows you to make a single large contribution each year that can be paid out later to the charities of your choice, you’re not forced to select the charities right away. If you donate appreciated securities to a DAF, you can receive an income tax deduction (in the current year) based on the fair market value of the securities while avoiding the capital gains tax impact of selling them outright.

5. Taking Your Required Minimum Distribution (RMD)
Anyone born after June 30, 1949, falls under the SECURE Act and uses age 72 for beginning RMDs. Anyone born on or before June 30, 1949, stays under the pre-SECURE Act age 70½ RMD rule. You must take your required minimum distribution (RMD), based on the total value of your traditional IRAs and 401(k)s, by December 31. Be careful. If you miss the deadline, the penalty is 50% of the amount that should have been withdrawn. If you turned 72 this year, there is an exception; you can delay taking your RMD until April 1, 2022.

If you don’t need the money and want to avoid paying income taxes on it, you can make a Qualified Charitable Distribution of up to $100,000 directly from your IRA to a qualified charity instead. The distribution counts toward your RMD and is income tax-free, however it is not eligible for a charitable deduction.

6. Maximize Contributions to Tax-Advantaged Retirement Accounts
Make sure you’re taking full advantage of any company-sponsored retirement plans available to you. In addition to contributing enough to capture any company match, consider contributing the $19,500 maximum for 2021, plus the $6,500 catch up amount, if you’re age 50 or older. In addition to maximizing your retirement account contributions, we can explore the potential benefits of converting an existing IRA into a Roth IRA. You may also contribute up to $230,000 to a Defined Benefit Plan.

7. Reviewing Employer-Provided Benefits Including FSAs and HSAs
With open enrollment for employer-provided health and welfare plans taking place in the fall , it is also the time to use this "window of opportunity" to compare plans and coverage to be sure the plan you select still meets your needs, especially if your personal or family situation has recently changed.

During open enrollment you may change to a different medical or dental plan to increase coverage or lower costs. You may also choose to enroll in a high deductible health plan and Health Savings Account (HSA) option, if that is offered. Any money left in these plans at year end has the potential to grow tax-deferred and will not be taxed when it’s withdrawn in the future to pay for qualified medical expenses.

By contrast, a Flexible Savings Account (FSA) may require you to use the money contributed to it by the end of the calendar year or lose it. New legislation allows employers to let you carry over unused balance or take an extra twelve months to use the funds, however your employer is not required to give you these options. Be sure to check your plan to see what flexibility you have and what expenses your FSA covers.

8. Prepaying Expenses to Increase Your Tax Deductions
Prepaying property taxes, mortgage payments, medical bills or estimated state or local income taxes may give you additional itemized deductions that can reduce your taxable income. In addition, the Tax Cuts and Jobs Act provides reduced tax rates for small businesses (earning less than $329,800 for joint filers in 2021) organized as pass through entities (partnerships, S corporations, LLCs, LLPs and sole proprietorships). Prepaying or accelerating business deductions may help you reduce your taxable income and qualify you for lower tax rates.

9. Distributing Trust Assets to Beneficiaries
Trusts reach the top tax brackets more quickly than individuals do. If you’re the trustee for a trust that gives you discretion regarding the timing of income distribution to beneficiaries, consider making beneficiary distributions before year end, rather than having the trust taxed at the higher trust-level tax rate. Consult your financial advisor, trust officer, trust administrator or tax preparer for guidance.

10. Managing Changes if You're Recently Married
If you got married this year, don’t forget to check in with your tax advisor. While some changes will be necessary, such as notifying the IRS and Social Security regarding a new name or address are just "good housekeeping" practices, others can affect the amount of taxes you’ll pay.

For example:

While you may have been able to deduct up to $3,000 of capital losses on your tax return when filing as individuals in the past, a married couple filing jointly is now limited to a total $3,000 loss. A married couple filing separately is now limited to a $1,500 loss. Conversely, filing jointly with a new, non-working spouse may be an opportunity to reduce your withholding or estimated tax payments.

Please Note: Since your tax filing status is determined on the last day of the tax year, you and your new spouse will be treated as "married" for the entire year, and can no longer claim "individual" filing status, regardless of when you got married. Instead, your filing choices for this year’s return will be "married, filing jointly" (where incomes and deductions are combined) or "married, filing separately," which can be more complicated in community property states. If you have one, the terms of your prenuptial agreement may also affect your filing choice.

11. 529 Plans
We typically review asset allocations to delever risk as the child gets older and closer to use of funds. We can also explore the possibility of front loading gifting (up to 5 years), which would allow for a $75,000 contribution per donee ($150,000 contribution per donee for a married couple). A 529 plan may also be used for qualified K-12 education expenses up to $10,000 per year.

If you have any questions on the above or would like a recommendation on a tax advisor please reach out to us at anytime.

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