Year-End Tax Planning Strategies & Tips for 2021

Year after year, December proves itself to be one of the busiest months. Between extra time with family and friends, buying gifts for everyone on your list and a different holiday gathering every weekend, there is barely time to take a breath, let alone begin planning for filing your taxes. But before the month ends, there are a few important things you can do to reduce your 2021 tax liability. The tax planning attorneys at Evolution Tax and Legal are here to break down the end of year tax strategies that will help you enhance your overall wealth and savings plan, as tax season rapidly approaches.

Explore Tax Loss Harvesting

Tax loss harvesting is a tactic that can be useful in years where the stock market has seen a lot of stocks in the red and overall decreases. With tax loss harvesting, a stockholder can sell investments that are down and replace them with similarly priced investments, then offset realized investments gains with the original losses. This strategy can help tax bills be reduced by up to $3,000 per year.

Portfolio Gains

In 2021, the domestic equity markets were generally higher at year-end than the beginning of the year. As such, this year may have left your portfolio with many realized gains and few losses that can be used to offset the gains. As such, it may be worth exploring an adjustment to your income tax withholding or quarterly income tax payment to account for additional capital gains. Speaking with a tax professional can help determine the best course of action, to offset the capital gains as we enter into 2022.

Portfolio Losses

As discussed above, your portfolio likely ended the year with more gains than losses, but it is still possible that there are unrealized losses you haven’t accounted for. These losses may be used to decrease your tax bill, using tax loss harvesting methods. If you use tax loss harvesting to offset portfolio gains for tax purposes and intend to repurchase the stock sold, you must wait 31 days before doing so, or the tax-loss will be disallowed by the IRS.

If you determine that your capital losses exceed your capital gains for the tax year, you can use up to $3,000 of excess loss to offset other income, and any remaining capital losses can be carried forward, so if you have $5,000 in excess capital loss for 2021, you can offset $3,000 of income, and carry over the additional $2,000 to offset income in 2022.

Deferring Portfolio Losses

Typically, it is recommended to offset current capital gains with current capital losses. However, current discussions in Congress are proposing shifts to policy that could affect this recommendation in the future. The policy changes have not been announced, but some predict that if a proposal is enacted, it may be beneficial to defer losses to 2022, to allow the losses to offset gains that will be taxed at a higher percentage. The best course of action will be determined by speaking with a tax professional, who understands the implications the policy changes have for your personal portfolio gains and losses.

Give to Your Favorite Charity

One end of year tax strategy that will benefit your budget and your community is to explore making a charitable donation. If you are able itemize your tax return deductions, donating cash to your favorite charity will allow you to deduct the amount of your charitable contribution, depending on the application of certain percentages of your contribution. The standard deduction rate for itemized deductions was increased substantially by the 2017 Tax Cuts and Jobs act, meaning far fewer taxpayers are able to itemize deductions. If you are close to the threshold for itemized deductions and still want to make a sizable donation that could benefit your tax deductions, consider bunching your donations. By combining your donations year to year, and contributing double the amount every other year, you can meet the standard contribution rate and receive a sizable tax deduction every other year, when you may have been unable to meet the contribution by donating yearly.

If you are unable to itemize, you can still receive a tax benefit for certain charitable gifts. These charitable contributions must be made in cash within the current tax year that is allowed to be considered a deductible. This charitable gift cannot be made to a supporting organization or a Donor Advised Fund, and cannot be a carryover from a previous year. The threshold for this non-itemized charitable giving is $600 for married taxpayers filing jointly, and up to $300 for an individual filer.

Maximize Your 401(k) Contribution

If you contribute a percentage of each paycheck to your 401(k), you have until your last paycheck of the year, or December 31 to max out your allotted yearly contribution. For those contributing to a 401(k), the yearly allotted contribution is $19,500 per year, as of 2021. Those aged 50 and older can contribute an additional $6,500 each year, for a total of $26,000. Any contributions or matching program your employer adds to your 401(k) do not count towards your allotted contribution amount.

To increase your contribution amount, speak with your employer or human resources contact within your organization and ensure you haven’t yet met your allotted contribution limit. You may also be able to increase your contribution percentage, if you have an account with your 401(k) provider. Maxing out these contributions will help defer taxable income while also increasing your retirement savings for the future.

Check IRA Distributions

If you’ve reached the age of 72, you are required to be making regular, minimum distributions from your traditional IRA. While these distributions were suspended in 2020, they were reinstated in 2021 and failing to make these distributions each year can result in IRS penalties, including a 50% excise tax on the amount that should have been withdrawn based on your age and life expectancy. These required distributions only apply to traditional IRAs, which is another benefit of the pre-taxed Roth IRA.

After December 31, if you have faced penalties for not meeting minimum distributions, it is required that you make annual distributions to avoid further penalties. When making these distributions, it can be beneficial to instruct your IRA custodian to withhold tax from the payment. This is optional, but it can help you avoid the hassle of making estimated quarterly tax payments on the distributions.

Before the end of the year, ensure you have met your minimum distributions if you have reached the age of 72 and have a traditional IRA. This will help you avoid penalties as we move into the new year, and can help you ensure you will make regular distributions in 2022.

Watch Your Flexible Spending Accounts

If you have access to a flexible spending account through your job, which allows you to contribute money throughout the year to pay for expenses like childcare and medical bills, you may be at risk of losing any additional funds at year’s end. The money that is deposited in this account typically avoids income and Social Security taxes, but employees deposit the money with the understanding that any money not spent will be lost at the end of the year. If you have funds left in your flexible spending accounts at the end of 2021, speak with your employer and check if they have adopted an IRS allowed “grace period” which typically allows employees to access their flexible spending funds until March 15 of the following year. If your employer has not adopted the grace period, you can attempt to spend the funds by the end of the year, by using them at the drugstore, optometrist or dentist before December 31.

How Evolution Tax and Legal Can Help With Year-End Tax Planning

As you finalize your year-end tax planning, using the strategies mentioned above and others you have independently researched, it can be beneficial to speak with a tax professional to determine which strategies are best for your financial situation. The team at Evolution Tax and Legal understands the implications that current legal discussions within Congress may have for your tax season and portfolio, while also understanding which year-end tax strategies can be best to minimize your taxes paid as we head into the new year. Contact the team today to discuss your tax returns and year-end strategies to save.

December 27, 2021

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